When China passed new amendments to IIT law in June of 2018, it introduced a host of changes to the system of individual taxation in the country, many of which took effect from January 1st, 2019. Among them were provisions made to the taxation of annual bonuses allowing for a transition period (Caishui [2018] No. 164) which provides China taxpayers the option to opt-out of the new system and continue using the preferential tax treatment for annual bonuses until December 31st, 2021.

This article aims to elaborate on the new comprehensive income tax policy for calculating annual bonuses and discuss the applications of the new IIT law for China taxpayers. We have also provided a downloadable annual bonus tax calculator for determining whether one should opt to switch to the comprehensive income tax policy during the transition period based on individual circumstances.

 

The Comprehensive Income Tax Policy

China taxpayers have the choice of applying the Comprehensive Income Tax Policy outlined in the new IIT law for the treatment of their annual bonus according to the new laws. The Comprehensive Income Tax Policy combines annual gross salary with all bonuses into a comprehensive annual income taxed at the same progressive rate as salaries and other income.

Below is the formula and applicable tax rates used to calculate IIT liability from annual bonuses using the new Comprehensive Income Tax Policy;

(Annual Gross Salary + Gross bonuses received) x (Applicable tax rate) – (Quick Deduction) = (Tax Liability for total annual income)

Applying the One-Time Preferential Tax Treatment

Since 2005, China taxpayers have been allowed a one-time preferential tax treatment for calculating the tax liability of their annual bonus’ according to SAT [2005] No. 9. This one-time preferential tax treatment allows annual bonuses to be calculated separately from your salary by dividing the annual bonus by 12 in order to apply a lower tax rate. This preferential treatment of annual bonuses can only be applied once, after which any other monthly, quarterly or other performance bonuses will be taxed at the progressive rate together with salaries and other income.

Below is the formula and applicable tax rates used to calculate the IIT liability from annual bonuses using the one-time preferential tax treatment policy;

(One-time Annual Bonus) x (Applicable tax rate*) – (Quick deduction) = (Tax liability for annual bonus)

*Applicable tax rate is found by dividing the one-time annual bonus by 12 and using the below tax table.

The notice of transition rules (Caishui [2018] No. 164) allows the continued use of the one-time preferential treatment until Dec 31st, 2021, after which the preferential treatment will be replaced with the new comprehensive income tax policy for all China taxpayers.

The comprehensive income tax policy may be preferential in some situations, but not others, depending on several factors such as the distribution of income between salary, bonuses, other forms of income; as well as deductible expenses such as itemized deductions and compulsory social security payments.

Deciding whether to opt-in to the new comprehensive income policy during the transition period should take into consideration the circumstances of each individual. Should a China taxpayer opt-in for the new policy, they can no longer apply the preferential tax treatment.

We have provided a downloadable Annual Bonus Tax Calculator to assist China taxpayers to determine whether they wish to apply the comprehensive income tax method during the transition period or to continue using the one-time preferential tax policy. However, as with any important financial decision, it is advised that you seek the help of a professional to best judge the individual circumstances.

Click here to download the Annual Bonus Tax Calculator

How to Use the Calculator

Annual gross salary

This is your salary from January to December 31st before any taxes and deductions. Do not include any allowances or benefits for expatriates such as housing rental, laundry, meal, children’s education, flights to their home country, etc.

Annual bonus (one-off)

This is the one-time annual bonus in question. If you receive multiple bonuses throughout the year, you may input the highest single bonus received and the others should be combined with the annual gross salary.

Social security deductions

This consists of the portion of compulsory social security payment made by the individual. Do not include the social security contribution made by the employer.

Additional itemized deductions

Input any qualified additional itemized deduction amounts here. Additional itemized deductions are those which are available to all China taxpayers, not just expatriate, including; Housing rental, mortgage interest rates, children’s education, expenditure on dependent parents, continuing education expenses and healthcare costs.

Other qualified deductions (if any)

Such as qualified commercial medical insurance, qualified donations to non-profitable organization, etc., according to China IIT regulations.

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