China Individual Income Tax

1. Overview

When foreign companies conduct business in China, the Individual Income Tax (IIT) is an important regulation directly related to salary systems and human resource strategies.  IIT is taxed at progressive rates (3-45%) on individuals, unlike corporate tax. 
Residents (individuals who stay in China for more than 183 days or have a domicile in China) are taxed on their worldwide income, while non-residents (those who stay for less than 183 days in a year) are only taxed on income sourced in China. 
Since the 2019 reform, four categories of income—salary, labor remuneration, manuscript fees, and patent royalties—have been consolidated as "comprehensive income," and the progressive tax rate is applied to the remaining amount after deducting the standard deduction (60,000 yuan annually) and various deductions from the annual income. Employers are obligated to calculate and withhold IIT monthly when paying salaries, and accurate calculation and payment are required.

2. Key Topics

Classification of Residency and Taxable Income

China's IIT classifies taxpayers into residents and non-residents, with different tax scopes for each. Residents are taxed on income earned both inside and outside of China, while non-residents are only taxed on income sourced in China. Taxable income is divided into the following nine categories.

1. Salary and Wages – Basic salary, bonuses, allowances, stock options, etc. Employers withhold taxes monthly.
2. Labor Remuneration – Compensation for personal services outside of employment contracts. Taxed after a 20% estimated deduction.
3. Manuscript fees – Income from the publication and distribution of works. Taxed after a 20% estimated deduction, with an additional 30% deduction on the remaining amount.
4. Patent royalties, etc. – Income from licensing intellectual property rights. A 20% estimated deduction is applied.
5. Individual business income – Income from sole proprietorships, partnerships, and contract or rental management.
6. Investment dividends – Dividends received from companies, institutions, and residents. No estimated deduction is applied, and a flat tax is imposed.
7. Rental income from real estate, etc. – Rental income within China.
8. Capital gains – Income from the transfer of real estate, stocks, and other assets.
9. Occasional income – Temporary income that does not fall under the above categories, such as prizes.

For residents, the first four types of income are combined into "comprehensive income" and taxed on an annual basis. Non-residents calculate these four types of income as they occur, with withholding tax applied monthly or per payment.

Tax rates and basic deductions

The tax rate on comprehensive income is progressive in seven tiers from 3% to 45%. For example, a tax rate of 3% applies if taxable income is below 36,000 yuan per year, and 45% applies if it exceeds 960,000 yuan. Non-residents' salary income is subject to the same tax rates, but a monthly segmented taxable standard is used. All taxpayers are allowed a standard deduction of 5,000 yuan per month (60,000 yuan per year) .

Special deductions and special additional deductions

In addition to the basic deduction, "special deductions" such as social insurance premiums and housing fund contributions can also be deducted. Legal contribution rates are set by region, and amounts exceeding the limit are not eligible for tax-free deductions.
Furthermore, the "special additional deduction" system was introduced in the 2019 amendment, allowing the following expenses to be deducted:

•  Childcare expenses for children under 3 years old – 2,000 yuan per month per child (24,000 yuan per year). Deduction can be split 50/50 between spouses or 100% by one.
• Child education expenses – 2,000 yuan per month per child from preschool education to university.
• Continuing education expenses – Education expenses for oneself or children. Professional qualification acquisition is 3,600 yuan per year, degree education is 400 yuan per month, for a maximum of 48 months.
• Medical expenses for critical illnesses – Actual expenses for out-of-pocket medical costs exceeding 15,000 yuan can be deducted up to a limit of 80,000 yuan.
• Mortgage interest – Interest on the first mortgage can be deducted at 1,000 yuan per month for a maximum of 20 years.
• Elderly support expenses – If supporting parents or others over 60 years old, 3,000 yuan per month (36,000 yuan per year) can be split among siblings.
• Housing rent – If not owning a home, deductions of 800 to 1,500 yuan per month can be made depending on the region.

Additionally, contributions to corporate pensions, commercial health insurance, and tax-deductible pension insurance are also eligible for deductions.

In addition, for foreign employees, certain fringe benefits will be treated as non-taxable due to the transitional measures under the pre-revised tax law. Major examples include housing allowances, meal and laundry allowances, education expenses for children, language training expenses, relocation costs when moving or returning, business travel expenses, and return travel costs. These are preferential measures recognized by the tax authorities if certain conditions are met, and it has been indicated that they will continue until the end of 2027. It is important to design correctly from the contract stage and prepare documentation for application.

In addition to these, several regions such as the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) and Hainan Island have established preferential and subsidy systems for IIT.

Monthly Reporting and Annual Tax Return

Residents are required to conduct annual settlement (tax return) between March 1 and June 30 of the following year. If income is obtained from multiple employers or if the monthly withholding amount is either too low or too high, adjustments will be made during this settlement. Examples of cases requiring a tax return include obtaining income without a withholding agent, income from multiple salary payers, obtaining overseas income, and when deregistering or moving overseas. Employers must submit the “Individual Income Tax Withholding Declaration Form” to the online system or tax office within 15 days of the following month. At the time of the first payment, there is also an obligation to submit the “Individual Income Tax Basic Information Form (Form A)” containing the taxpayer's basic information.

3. Related Articles

Explore practical guidance on China Individual Income Tax, social insurance and payroll matters for foreign expatriates.

• China Business Travel Allowance and IIT Rules for Expatriates

• China Social Insurance for Expatriates and Foreign Employees

• Tax Considerations When Becoming a Chinese World-wide Income Taxable Resident