In recent months, the Chinese government has been actively
taking measures to stimulate the economy and attract further
inbound investment. To this end, individual income tax (IIT)
reform, as well as recent corporate income tax (CIT) and VAT
reduction measures are set to reduce substantially tax burdens
for many taxpayers. At the same time, more industries have been
opening up to investment by private enterprises, while
registration of new businesses has been simplified.
With regard to the IIT reform, at the end of December 2018,
China's Ministry of Finance (MOF) and State Administration of
Taxation (SAT) released their final implementation rules of the
revised IIT law (which was passed in August 2018) with measures
clarifying itemised tax deductions. Alongside these, further
guidance to clarify the revised IIT law was introduced. The
revised IIT law and related guidance took effect from January 1
2019.
In the final implementation guidance, a notable item for
foreign individuals working in China is the "six-year rule".
This rule supersedes the prior "five year concession" set out
under the old IIT law. The new rule slightly modifies and
extends this exemption. Under this, individuals who are deemed
non-domiciled in China (and who have not resided in China for
six full consecutive years) may claim an exemption for their
foreign-sourced income paid overseas. A filing with the tax
authorities will be required in this instance. Under the IIT
law, residing in China for a full year is defined as a presence
of more than 183 days in China in a calendar year. The
cumulative six-year residence period calculation restarts when
the non-domiciled individual is absent from China for more than
30 continuous days in any given year.
It should be noted that under the previous five-year
concession, either a 30-day consecutive absence or a 90-day
non-consecutive absence was sufficient to break a consecutive
five-year presence. However, under the six-year rule, the
90-day non-consecutive absence provision has been deleted,
limiting access to the relief for some foreign nationals.
Nevertheless, the retention (and expansion) of this exemption
will help businesses to retain foreign nationals working in
China.
In addition to the significant revamp of the IIT system,
China continues to improve its business environment for foreign
and Chinese enterprises. In this regard, recent notable
developments include:
- Tax reductions for small and medium-sized
enterprises (SMEs): At an executive meeting of China's State
Council on January 9 2019, Premier Li Keqiang announced
further tax reductions for SMEs. Eligible SMEs may enjoy
reduced CIT rates of 5% or 10% (the normal rate is 25%). The
5% rate applies to enterprises with annual profits of less
than RMB 1 million ($150,000); the 10% rate for enterprises
with profits up to RMB 3 million. Beyond the profit
requirements, to qualify as an eligible SME, the total assets
and the number of employees should also be lower than RMB 50
million and 300, respectively. In addition to this, the VAT
exemption threshold for small enterprises has been increased
to $15,000 per month (previously $4,500 per month). These
preferential tax treatments will tentatively be implemented
for three years (January 1 2019 to December 31 2021).
- Nationwide rollout of the "negative list"
for market entry: On December 25 2018, China's National
Development and Reform Commission (NDRC) and MOF released the
2018 edition of the negative list for market entry, which is
applicable nationwide from the date of issuance. This listing
clarifies sectors of the Chinese economy in which private
enterprises are permitted to invest, covering both those in
foreign and in domestic ownership. For foreign investors, it
must be noted that these are also the requirements in the
separate negative list for foreign investment. The most
recent version was issued on June 28 2018.
Previously, the negative list had operated on
a pilot basis, with four provinces/cities from March 2016, and
15 from 2017. Now, the 2018 negative list has a total of 151
items, which includes four items for which entry is banned, and
147 items for which entry is restricted. This is a substantial
reduction from the trial version's total of 328 items, which
included 96 banned and 232 restricted items.
- Simplified business registration
documentation requirements: On January 7 2019, China's State
Administration for Market Regulation (SAMR) released rules
simplifying the documentation requirements for business
registration. These will come into effect from March 1 2019
and cover filings for business group registration, the
establishment of subsidiaries, and the establishment,
alteration, and de-registration of foreign invested entities
(FIEs). These tax developments complement other recent
efforts to cut red tape and facilitate business activity in
China.
Khoonming Ho (khoonming.ho@kpmg.com) and Lewis Lu (lewis.lu@kpmg.com)
KPMG China
Tel: +86 (10) 8508 7082 and +86 (21) 2212 3421
Website: www.kpmg.com/cn