CHINA Law and Practice Contributed by: Mei Zhang, DaHui Lawyers
Residence-Based Taxation (Worldwide Income) • Tax resident enterprise (“TRE”): As stipulated in Article 3 of the PRC CIT Law, a TRE (broadly defined as an enterprise established under Chi - nese law or with effective management in China) is subject to corporate income tax (“CIT”) on its worldwide income. • Tax resident individual: According to Article 1 of the PRC IIT Law, a resident individual (defined as one domiciled in China, or one without a domicile but who has resided in China for 183 days or more in a tax year) is subject to individual income tax (“IIT”) on worldwide income. Source-Based Taxation (China-Sourced Income) Non-TREs and non-resident individuals: China exer - cises taxing rights over all income derived from sourc - es within Mainland China, irrespective of the taxpay - er’s residence status. • A non-TRE with an establishment or place in China is taxed only on income attributable to that establishment. A non-TRE without such an estab - lishment, or whose China-sourced income lacks a taxable nexus to its establishment, is subject to withholding tax on the non-TRE’s China-sourced income. • A non-resident individual (as defined under the PRC IIT Law) is generally subject to IIT only on income sourced from within China. Special Administrative Regions The Hong Kong SAR and Macao SARs maintain inde - pendent tax systems under the “one country, two systems” principle. To resolve potential cross-border tax conflicts and avoid double taxation, the Mainland has entered into special tax arrangements with each SAR, which function analogously to DTAs. Although the PRC and Taiwan have signed a similar arrange - Under the PRC IIT Law and its implementing regula - tions, an individual is a Chinese tax resident if they meet either of the following two criteria: • By domicile: An individual is “domiciled” in main - land China if they have a permanent registered ment, it has not yet come into effect. 2.2 Tax Residence of Individuals
address, family ties, or economic interest in the PRC. “Domiciled” individuals in Mainland China are tax residents. For example, if an individual resides overseas due to school, work, family visits, or tour - ism, and after completing their matters they return to stay in Mainland China, they are a “domiciled” individual. • By duration of residence: An individual without a domicile in Mainland China but who has resided there for 183 days or more in aggregate within a tax year is a Chinese tax resident. 2.3 Taxation of Resident Individuals Chinese tax residents are liable for IIT on their world - wide income. The primary mechanism to alleviate double taxation arising from foreign-sourced income is the Foreign Tax Credit (“FTC”) system, which is sub - ject to the following rules. Taxation Methods China implements a hybrid IIT system that adopts comprehensive, business and categorical tax rates. • Comprehensive income: Includes wages and salaries, remuneration for personal services, and author’s remuneration and royalties, which are consolidated for tax calculation on an annual basis. The amount of taxable income is calculated by subtracting the basic expense of RMB60,000, itemised deductions for specific expenditures, and other deductible items from the balance of annual income. The amount of taxable income is subject to progressive tax rates ranging from 3% to 45%. • Business income: This is income from production and business operations of individual, industrial and commercial households, investors of sole proprietorship enterprises, partners of partnership enterprises, etc. It is calculated on an annual basis, and the amount of taxable income is the remaining gross income after costs, expenses and losses are deducted, subject to progressive tax rates ranging from 5% to 35%. • Categorical income: This includes interest, divi - dends and bonuses, property leasing income, property transfer income and contingent income. Such income is not consolidated with domestic comprehensive income and is separately taxed on a transactional basis at a flat tax rate of 20%.
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