Comments to the MOF's Implementation Rules of the Individual Income Tax Law (Revised Draft for Comments)

2018-11-02 | All chapters

The European Chamber welcomes the decision of the Ministry of Finance to publicly call for comments on the Draft Implementation Rules to the Individual Income Tax Law and the draft of the Interim Measures for Special Additional Deductions of Individual Income Tax (Draft Interim Measures). The Draft Implementation Rules further specify relative clauses of the new Individual Income Tax (IIT) Law. The new IIT law introduces the definition of China tax resident, which imposed significant influences on the non-domiciled individuals (usually referred to as foreign nationals and Hong Kong, Macau and Taiwan permanent residents, hereby referred to as “Non-Chinese nationals”). The Draft Implementation Rules refine the definition of tax residents in details. Particularly, the Draft Implementation Rules still maintain the “Five-year rule” for non-Chinese nationals to avoid China tax on foreign sourced income. The European Chamber warmly welcomes the clarifications regarding the tax treatment that will be applicable to foreign nationals, as a sign of the perdurable commitment of the authorities to attract overseas talent to China.

Meanwhile, the Draft Implementation Rules also replenish the scope of China-sourced income, the scope of taxable income and IIT calculation method, annual reconciliation filing requirements as well as other specific IIT collection and administration rules, and elaborate the anti-avoidance rules introduced by the new IIT law. These specific rules proposed by the Draft Implementation Rules help individuals and companies to understand the new IIT law and to implement the new IIT laws effectively.

However, the following aspects of concern remain without clarification in the draft implementation and thus need to be further clarified:

1.  Tax treatment for annual bonuses. It is not clear whether the tax calculation method on annual bonus will be maintained or not. Given the remarkable impact of a change on its currently favorable tax treatment, we strongly recommend to further clarify on the upcoming final version of the Implementation Rules.

2.  Equity income of listed companies. It is not clear whether the tax calculation method on equity income of listed companies will be maintained or not. Given the considerable impact that a change would generate, we recommend to clarify further.

Considering the great changes brought by the new IIT law, we suggest that the legislature should take a more careful attitude towards the enactment of tax implementation provisions. More detailed explanations and more specific instructions should be announced in order to ensure the effective implementation of the new IIT law.