IIT Deduction for Salary and Wages in China

How is IIT deduction in China? IIT deduction in China is relative straightforward. Even individuals who have no full knowledge of IIT deduction can still follow the instruction issued by tax authority and file the deduction in IIT filing system.

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IIT deduction is different based on the category of income and individual tax status. However, Compared to salaries and wages, the deduction for other income is further more simplified. For example, the deduction for the income from business operation is the actual cost spent on the business; the deduction for income from lease of property is either RM800 if the income is not more than RMB4,000, or 20% of income if the income is more than RMB4,000. In this article, we will focus on the IIT deduction for salary and wages.?

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China IIT deduction for salary and wages includes standard deduction (for example, RMB5000 per month or RMB60000 per year for comprehensive income), social insurance and housing fund born by individuals, special deductions (infant care, kid education, adult education, rental, housing loan, elderly care, medical treatment for serious illness) and other deductions. However, unlike some countries, China IIT regime offers a certain fixed amount instead of considering total family burden or actual spending for most deductions for salary and wages. For example, if you have a loan for buying house, only a fixed amount RMB1000 instead of full interest on loan can be deducted for IIT purposes. furthermore, if both husband and wife are the borrower of the same housing loan, only a total amount RMB1000 can be deducted. Taxpayers may select either husband or wife to deduct RMB1000, or deduct RMB500 each.

The applicable individual tax status and income for each deduction

Different individual tax status apply different deductions. Specifically, individual tax residents are entitled to monthly(yearly) standard deduction, special deduction, social insurance and housing fund born by individuals and other deduction while individual non-tax residents are only entitled to monthly(yearly) standard deduction.

So what is the individual tax residents for IIT purpose??Individual's tax status are depending on the living days in China in one calender year or whether the individuals have a domicile in China. Individuals?shall be deemed as resident individuals?if they do not?have a domicile in China but have resided in China for 183 days or more cumulatively within a tax year. Having domicile in China refers to habitually living in China due to census register, family or economic benefit relationship.

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How to calculate the 183 days living in China??183 days are counted from the day you enter into China to the day you exit from China. The entering and exit days will not be counted in the days living in China if the day is not more than 24 hours.

Standard Deduction

As described above, both tax resident individual and non-tax resident individual can enjoy standard monthly or yearly deduction, i.e. RMB5000 per month and RMB60,000 per year.

Social insurance and housing fund deduction

In China, it is a statutory requirement to join the social insurance and housing fund regime for employers and employees. The social insurance and housing fund are divided into two parts, one part is born by employers, the other part is born by employees. The portion born by individuals can be deducted for IIT purpose.

As mentioned above, the social insurance and housing fund deduction is not applicable for non-tax resident individuals since non-tax resident individuals are not required to pay the statutory social insurance and housing fund in China.

Special Deduction

Special deduction includes baby care, kid education, adult education, rental, house loan, elderly care, medical treatment for serious illness. Except the medical treatment for serious illness can be deducted on actual base, other deductions are deducted base on a certain fixed amount.

Infant care

In order to increase population and encourage the fertility, China tax authority add a new special deduction, i.e. infant care. Starting from January 1 2022, for taxpayers who has infant under three years old can deduct RMB1000 per month for each infant. Either parent may claim for 100% deduction or both parents may claim for 50% deduction each under the deduction standard, and the deduction method shall remain unchanged within one tax year. ?

Kid education

The monthly deduction standard is RMB1000 per kid. Either parent may claim for 100% deduction or both parents may claim for 50% deduction each under the deduction standard.

Tax payers are required to provide the name of his/her spouse and children, ID number the current education stage and starting and ending dates, the schools，the deduction sharing ratio between the taxpayer and his/her spouse, etc.

Adult education

The standard deduction for academic (degree) continuing education is RMB400 yuan per month and for vocational qualification continuing education is RMB3600 per year.

If children have been employed and are still accepting the continuing education under bachelor degree,?either parents or children can deduct the adult education for IIT purpose.

To enjoy the adult education, taxpayers need to provide the staring and ending date of education, stage, certificate name, certificate No, issuing authority etc.?

Rental

The monthly deduction per month is classified as three classes based on the scale of the city and population, RMB1500, RMB1100 and RMB800. Beijing, Shanghai, Guangzhou, Shenzhen etc. are applicable for the first class of deduction.

The detailed rules are provide for different scenarios, for example, if?husband and wife work in the same workplace, city, the rental deduction can only be enjoyed by one party who sign the rental contract. Otherwise both wife and husband can enjoy the rental deduction based on the main workplace where they live if they don’t own a house in that workplace; Where a taxpayer's spouse owns a house in the workplace where the taxpayer?work, the taxpayer shall be deemed to own a house in his/her main city where he/she work.

Practically taxpayers may works in different cities. The main workplace refers to the city where taxpayers is engaged. If the actual workplace is not the workplace where the taxpayer is engaged, the actual workplace can be seen as the main workplace and the deduction standard of rental in the actual workplace can be applied.?

A taxpayer claiming special additional deduction for rental?shall provide?information such as the main workplace city, address of the leased house, name, lease commencement and ending dates etc.

Housing loan

The standard deduction is RMB1000 per month and the maximum deduction period shall not exceed 240 months, i.e. RMB240K for the loan. Wife and husband can choose one of the party to enjoy the deduction for IIT purpose.

Tax payers shall provide the housing ownership, address of the housing, lending bank, loan contract serial number, loan period etc.

Elderly care

Elderly refers to the taxpayer’s parents, including biological parents, stepparents, and adoptive parents, as well as grandparents whose children have all died. The elderly shall be over the aged of 60(inclusive).

The standard deduction is RMB2000 if parents has only one child. If not, the standard deduction be apportioned among children but the maximum deduction for each shall not exceed RMB1000 per month.

Taxpayer shall provide the elders’?name, ID number etc.

Medical treatment for serious illness

From January 1 to December 31, the medical expenses exceeding RMB15000 but not more than RMB80000 related to the basic medical insurance born by individuals can be deducted for IIT purpose.

Taxpayer is required to provide the name, ID, total amount of medical expenses in relation to the basic medical insurance, the amount borne by the individual within the scope of the list of medical insurance etc.

Other deduction

The donations to education, poverty alleviation and other public welfare and charitable undertaking can be deducted for the part which does not exceed 30% of his/her declared taxable income amount.

The commercial health insurance and tax-deferred tax commercial pension insurance purchased by individuals, enterprise annuity and professional annuity borne by individuals can be deducted for IIT purpose.??

Expatriate deduction

Expatriate can choose to deduct either allowance or special standard deduction in his/her IIT filing. As a special treatment, expatriates have been allowed to deduct allowance, such as laundry allowance, rental allowance, home trip allowance, kids education allowance etc. in IIT filling all the time. Since the new IIT laws and regulations was effective from 2018, expatriates are given certain probation period during which expatriates may choose the deduction way either in allowance or standard deduction. The most updated IIT rules has extended the probation period to December 31 2023.???

Deduction filing method

There are two deduction filing method for taxpayers in China, e-filing or paper filing. A taxpayer choosing e-fling may fill the information on the special IIT app. Then the withholding agent (normally the payer) can file the IIT based on the deduction information in the special IIT app. In paper filing method, taxpayer needs to fill the signed Deduction Form and send it to withholding agent directly. Then withholding agent file the Deduction Form to tax authority.?

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