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.
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