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China publishes draft rules for implementation of new individual income tax law and specific additional tax deductions

Executive summary

On 20 October 2018, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) jointly published draft implementation rules regarding the new Individual Income Tax (IIT) Law (“the Draft Implementation Rules”) and draft rules for specific additional tax deductions (“Draft Rules of Additional Deductions”) on the SAT’s website. The release of the drafts is intended to allow for public consultation, and is open for public comments until 4 November 2018. The Draft Implementation Rules make important clarifications to the application of the new law.

Key issues

Draft Implementation Rules for the IIT Law

Refining the definition of tax resident        

The new IIT Law changed the definition of China tax resident for non-domiciled individuals (usually referred to as foreign nationals and Hong Kong, Macau and Taiwan permanent residents) from requiring presence of one full year to including individuals who have resided in mainland China for 183 days or more within a tax year. 

The Draft Implementation Rules provide that a non-domiciled individual, being a China tax resident, may be exempt from tax in China on non-China sourced income. This will be the case only if such income is not paid by Chinese enterprises, organizations or individuals and as long as a filing of the situation is performed with the local tax authority, in either of the following situations:

  • He or she has been a China tax resident for no more than five consecutive years; or
  • He or she has been a China tax resident but during the five-year period, he or she is absent from China for more than 30 consecutive days in one trip.

If an individual is a China tax resident for five consecutive years and if he or she is not absent from China for more than 30 consecutive days during the five-year period, he or she will be subject to tax in China on the non-China sourced income in any year in which he or she is a China tax resident, starting from the sixth year.

The “approval” requirement will be changed to “Registration” for China tax residents who reside in China for no more than five consecutive years or physically stay outside of China for more than 30 consecutive days during the five-year period for them to enjoy the tax exemption treatment on non-China sourced income. Individualsand companies should still pay attention to the specific registration requirement of local tax authorities.

Elaborating on the scope of other deductions

Other deductions stipulated in the IIT Law shall include individuals’ contributions to qualified enterprise annuities and occupational annuities, qualified commercial health insurance and commercial pension plans, and other items as stipulated by the State Council.

The total sum of special deductions, specific additional tax deductions and other deductions as mentioned above is capped at an individual’s annual taxable income in a tax year. Any unused deductions of an individual in one tax year shall not be carried forward to subsequent years.

Elaborating on anti-avoidance rules

The new IIT Law introduces an anti-avoidance of tax clause.  By reference to the corporate income tax law, the Draft Implementation Rules refine the relevant provisions of anti- avoidance, including related parties, related relationship, the principle of independent transactions, controlled foreign enterprises, obviously lower actual tax burdens and reasonable business needs as well as the calculation method of interest surcharge resulting from tax remediation. It also stipulates that the method for tax adjustment will be determined by the finance and tax authorities under the State Council.

Improving the IIT collection and administration

The Draft Implementation Rules stipulate situations where annual reconciliation is required for consolidated income:

  • Where a taxpayer receives consolidated income in two or more locations and the remaining amount of annual consolidated income minus special deductions (i.e. statutory social security and housing fund contributed by the taxpayer) exceeds RMB60,000;
  • Where a taxpayer receives income from remuneration for personal services, author’s remuneration or royalty and the remaining amount of the annual consolidated income minus special deductions exceeds RMB60,000;
  • Where the pre-paid tax amount is less than the actual tax liability in the tax year and there is outstanding tax liability;
  • Where a taxpayer needs to apply for a tax refund. Taxpayer’s bank account opened in China should be provided for tax refund purposes. 

The Rules also introduce situations where no tax refund will be offered by tax authorities:

  • Tax declaration or the information provided for annual reconciliation is fake as verified by the tax authorities and the taxpayer refuses to rectify the situation; 
  • Applications for tax refund are lodged after the due date of annual reconciliation filing. 

Draft rules for specific additional tax deductions

Standards and detailed rules of specific additional tax deductions

The standards and detailed rules of specific additional tax deductions are summarized in the table.


Standard Amount (RMB)

Scope of Application

Per Year

Per Month

Children education



Preschool education

Academic education

Continued education



Academic education



Continued education

Medical expenses for serious illness

Personal expense above 15,000, Deduction Capped at 60,000 (based on actual) 


Recorded in the social medical insurance management information system

Housing loan interest



The housing loan interest for the first residential property of taxpayer or spouse (commercial loans or provident fund loans)

Housing rent

9,600 - 14,400

800 - 1,200

Depending on the scale and registered population of the city

Caring for the elderly



Singleton (60 years old or above parents and other statutory grandparents)

Not exceeding 12,000

Not exceeding 1,000

Non-singleton (60 years old or above parents and other statutory grandparents)

Taxpayers and their spouses will not be able to access the specific additional tax deductions on housing loan interests and housing rent at the same time.

Provisions regarding non-Chinese nationals

Non-Chinese nationals who are entitled to specific additional tax deductions on children education, continued education, housing loan interest or housing rent may choose to access these deductions, or may continue to enjoy the current tax-exempt benefits on children education, language training and housing rent. However, they cannot access the specific additional tax deductions and tax-exempt benefits
at the same time for the same kind of expenditure.

Currently, there is no specific limit on children education and housing rent for non-Chinese nationals’ tax-exempt benefits. Generally speaking, the standard specific additional tax deductions on children education (RMB12,000 per year) and housing rent (RMB14,400 per year)  may be considered too low for non-Chinese nationals, and they may be better off choosing to access the current higher tax-exempt benefits.

Issues to be further clarified

The draft implementation rules do not specifically address the following matters, and further clarification is required:

  • Whether the favorable tax calculation method on annual bonus will be maintained or not;
  • Whether the favorable tax treatment on equity income of listed companies will be maintained or not;
  • How to compute tax for non-domiciled individuals who have foreign duties and will travel outside China frequently, and whether the time apportionment methods specified in Guo Shui Fa [1998] 148 will be amended.

Next steps

After opinions are received through the public consultation process in November 2018, the Draft Implementation Rules and Draft Rules of Additional Deductions will be finalized and are expected to take effect from January 2019.

We recommend that companies and individuals should closely monitor the final version of the rules and be prepared for the upcoming changes. EY will continue to provide latest updates in due course.

If you require any assistance, please consult your local EY advisor, or one of the contacts below.

EYG no. 011903-18Gbl

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