Summary Report on Chinese Individual Income Tax Policies

On August 28th, several policy announcements related to individual income tax were released by the Ministry of Finance and the State Taxation Administration of China. These policies aim to provide relief to taxpayers and support various aspects of taxation to stimulate consumption and investment.

To help you understand the what was presented in the announcement, our team has created a summary of each policy.

1) Annual One-time Bonus Individual Income Tax Policy 

Residents who receive an annual one-time bonus that meets the criteria set in previous notifications are eligible for special tax treatment. The bonus is not included in the comprehensive income for the year. Instead, it is separately taxed based on the monthly equivalent of the annual bonus income. This separate taxation is determined using the provided comprehensive income tax rate table.

Consolidated income tax rate table based on monthly conversion

 

The calculation formula is:

Tax payable = annual one-time bonus income x applicable tax rate – quick deduction number

Individual residents who obtain annual one-time bonuses may also choose to incorporate them into the comprehensive income of the year for tax calculation.

2) Individual Income Tax Policy for Foreign Individuals Regarding Allowances and Subsidies

Foreign individuals who meet the criteria of resident individuals have the flexibility to choose between two options for tax benefits. They can opt to utilize special deductions for individual income tax or alternatively, they can select to enjoy tax exemptions on various allowances, including housing subsidies, language training expenses and children’s education fees, as outlined in relevant regulations. It’s important to note that these benefits cannot be claimed simultaneously. Once foreign individuals make their selection, it remains fixed for the entire tax year and cannot be changed within same tax year.

3) Policy on Comprehensive Income Settlement and Payment for Individual Income Tax 

From January 1, 2024, to December 31, 2027, resident individuals who earn comprehensive income are eligible for exemption from the requirement to settle and pay individual income tax on their comprehensive income if they meet certain criteria. This exemption applies if:

1. 1. 1. 1. 1. Their annual comprehensive income does not exceed 120,000 yuan, and they are required to settle and pay supplementary tax, or
            2. The amount of supplementary tax to be settled and paid does not exceed 400 yuan.

It’s important to note that this exemption is not applicable if the individual had a withholding obligation and the withholding agent failed to pre-withhold and prepay taxes according to the law at the time the comprehensive income was earned.

4) Individual Income Tax Policy for Personal Income from Listed Company Equity Incentives

Resident individuals who acquire stock options, stock appreciation rights, restricted stock, and other equity incentives (hereafter referred to as equity incentives) that meet the conditions specified in several official notifications (dated 2005, 2009, 2015, and 2016) will not have these incentives incorporated into their annual comprehensive income. Instead, they’ll be taxed separately using the comprehensive income tax rate table.

The tax calculation is:
Tax payable = Equity incentive income × Applicable tax rate – Quick deduction.
If an individual taxpayer receives stock incentives two or more times (including twice) within a tax year, the incentives should be combined for tax calculation.

5) Individual Income Tax Policy for Personal Partners of Entrepreneurial Investment Enterprises

The notice from China’s Ministry of Finance, the State Taxation Administration, the National Development and Reform Commission, and the China Securities Regulatory Commission primarily focuses on the procedures Chinese venture capital firms should follow when calculating personal income tax for their partners.

Venture capital firms can opt for one of two methods to determine personal income tax: they can either base calculations on a single investment fund or compute based on the firm’s annual total income. For those choosing the single investment fund method, income derived from the transfer of equity and dividends is taxed at a 20% rate. In contrast, if they opt for the total annual income approach, the income is taxed progressively at rates ranging from 5% to 35% depending on the amount.

Several detailed provisions are provided for calculating tax using the single investment fund approach, including how to account for income from equity transfers and dividend receipts. Certain expenditures, like the fees and remunerations for the fund managers, cannot be deducted in these calculations.

If venture capital firms decide on the total annual income method, it involves summing up the year’s total income, subtracting costs, expenses, and losses, and then determining the amount to be distributed to individual partners. Special provisions allow for certain deductions under specified conditions.

Once a venture capital firm selects a method, they are bound to it for three years. They must also register their chosen method with the relevant tax authorities.

6) Notice on the Continuation of Individual Income Tax Preferential Policy for the Guangdong-Hong Kong-Macao Greater Bay Area

A subsidy is granted to foreign (including Hong Kong, Macau, and Taiwan) talents working in the GBA, equivalent to the difference in individual income tax burden between the mainland and Hong Kong. This subsidy is exempt from personal income tax. The criteria and subsidy methods will follow the relevant regulations of Guangdong Province and Shenzhen City.

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These policies cover diverse individual income tax situations and aim to offer assistance and backing to different taxpayer groups. These measures will remain in effect until December 31, 2027. For specific information and implementation instructions, it is recommended to refer to the official policy documents on the official website.