Key changes include making certain expenses deductible for Chinese employees and a reduction of deductions for foreign employees, revisions to the tax brackets to reduce taxes for lower and middle income workers, and changing the rules on when a foreign worker becomes taxable as a resident.
Expatriates working in China have previously been allowed to take a number of deductions in computing taxable income, while resident employees were not. Under the new law, all employees will be allowed deductions for:
These deductions will be reported to the employer and reduce tax on monthly income.
The result may be an increase of tax for foreign workers, who were previously allowed deductions for the items above plus laundry expenses, meal allowances, and home flights, among other things. Those deductions are no longer clearly allowable.
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The amount of income not subject to tax rises to 5,000 CNY per month (up from 3,500 for Chinese and 4,800 for expats).
Tax brackets are raised for employees making up to 35,000 CNY. For example, monthly income between 12,000 and 25,000 CNY is now taxed at 20% instead of 25%.
These changes will lower taxes even without considering the new allowable deductions.
Under prior law, a foreigner was not considered a resident until the individual was in China for a year or more. The new law will more closely resemble other countries’ residency rules, with foreigners considered residents after 183 days. This will increase taxes for some expats. It is also unclear what will happen to the current “5-year tax rule” under which a foreigner’s global income is only taxed if the individual has stayed in China for an uninterrupted 5-year period.
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Companies with employees working in China will need to understand these changes and incorporate them into payroll provisions and procedures. Some expats will experience higher Chinese tax, and others lower.