The Notice Defining Precisely the Implementation of Several Policies for Individual Income Tax was published by the State Administration of Taxation (SAT) on 17 August 2009. The Notice sets out a number of clarifications or changes in the taxation of double pay, directors’ fees, overseas Chinese and housing transactions.
Double pay and bonuses
Article 1 of the Notice puts an end to the method of taxation of double pay which was set out in Article 1 of The Reply of The State Administration of Taxation on Several Policies for Individual Income Tax (Guo Shui Han [2002] No. 629).
Guo Shui Han [2002] No. 629 reiterated and formalized the method the SAT would apply in calculating double pay, which has been in effect since 1996. Under this method, individual income tax would be imposed separately on year-end pay rises and one-off bonuses received throughout a year, as if such payments were a discrete month’s income. In 2005, the method of taxation of double pay was revised to become an apportionment method under which year-end pay rises, one-off bonuses received throughout the year and performance-related pay would be added to monthly pay equally across 12 months in order to determine the applicable tax rate.
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In an effort to clean up and clarify the status of previous taxation methods, the Notice reaffirms the abolition of the old year-end taxation method. Year-end pay rises shall continue to be taxed pursuant to the apportionment method introduced in 2005, without any change in the personal tax burden.
Directors’ fees
Article 2 of the Notice provides that fees paid to a company’s external (i.e. independent) directors or supervisors and internal (i.e. executive) directors or supervisors shall be subject to individual income tax levied on different categories of income.
For independent directors or supervisors, i.e. “individuals acting as company directors or supervisors and not holding an office in, and not being employed by, the company”, directors’ fees are to be taxed as “income from remuneration for personal service”. In contrast, for internal directors or supervisors, i.e. “individuals holding an office in and being employed by the company (including associates) and concurrently acting as directors or supervisors,” directors’ or supervisors’ fees should be combined with individual wages and subject to individual income tax rate on “income from wages and salaries”.
In addition, the third paragraph of Article 2 of the Notice requires that the implementation of Article 1 of the Notice of The State Administration of Taxation Regarding the Levy of Individual Income Tax on Directors of Foreign-invested Enterprises Holding Direct Managerial Positions (Guo Shui Fa [1996] No. 214) be halted. Accordingly, the provisions of that Article that “directors’ fees received in addition to the wages and salary received in the capacity of an employee are subject to different categories of individual income tax respectively” are repealed.
‘Overseas Chinese’ favoured
The Notice of the Overseas Chinese Affairs Office of the State Council Regarding the Publication of the Provisions for Defining the Status of Overseas Chinese, Chinese Expatriates, Returned Overseas Chinese and the Family Members of Overseas Chinese (Guo Qiao Fa [2009] No. 5) defines the term “overseas Chinese”.
For people who fall within the definition of overseas Chinese, wages and salaries received while working in China will be treated as “applicable additional deductibles” in a preferential treatment policy under Article 30 of the PRC Individual Income Tax Law Implementing Regulations, which means the balance of their wages and salaries, after a further deduction of RMB2,800 (US$410) on top of the standard deduction of RMB2,000, will be treated as the amount of taxable income.
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