CHINA Law and Practice Contributed by: Mei Zhang, DaHui Lawyers
Foreign Tax Credit (“FTC”) Mechanism: Core Principle and Calculation Core principle For the income obtained by a resident individual from outside the territory of China within a single tax year, the amount of income tax that has been levied and paid outside the territory of China under the tax law of the country (region) from which that income is sourced, may be used to offset the amount of IIT pay - able by the individual for the current tax year, to the extent of the offset quota. Calculation of the FTC Limit The overall FTC limit for income from a specific coun - try (region) is the sum of the limits calculated for each category of income sourced from that country: • FTC limit for comprehensive income = (total IIT payable on global comprehensive income) × (com - prehensive income from the specific country/total global comprehensive income); • FTC limit for business income = (total IIT payable on global business income) × (taxable business income from the specific country/total global tax - able business income); • FTC limit for other classified income = the actual IIT payable in China on that specific classified income from the country; and • total FTC limit for the country = the sum of the three amounts above. 2.4 Taxation of Non-Resident Individuals In accordance with the principle of territorial jurisdic - tion and relevant tax laws, non-resident individuals are only liable for IIT on income sourced from Mainland China, under the following rules. Scope of Taxable Income and Sourcing Rules The following broad categories of income derived by non-resident individuals are deemed to be sourced from Mainland China and are therefore taxable. • wages and salaries: income attributable to employ - ment services performed within China; • remuneration for personal services: income from providing services (eg, consulting, performances) within China;
• author’s remuneration: remuneration paid or borne by domestic enterprises, public institutions and other organisations; • royalties: income arising from the licensing of intangible property for use within China; • interest, dividends and bonuses: income obtained from domestic enterprises, public institutions, other organisations or resident individuals; • property leasing income: income from leasing property for use within China; • property transfer income: gains from the transfer of real property located in China or other properties (eg, equity in Chinese resident enterprises); and • contingent income: income from prizes, awards, or lotteries obtained within China. Several nuances are involved in the above catego - ries. For example, for individuals serving as directors, supervisors and senior management personnel of domestic resident enterprises, directors’ fees, super - visors’ fees, wages, salaries, and other similar remu - neration (including multi-month bonuses and equity incentives) paid or borne by domestic resident enter - prises are regarded as income sourced from Mainland China, regardless of whether the individual performs duties within Mainland China. Tax Calculation Methods Non-resident individuals are not eligible for annual final settlement of comprehensive income. Tax is lev - ied item by item on a monthly or transactional basis, and withheld and remitted by withholding agents. • Wages and salaries: A monthly deduction of RMB5,000 is allowed, subject to the monthly tax rate table for non-resident individuals (progressive tax rates ranging from 3% to 45%). • Remuneration for personal services, author’s remuneration and royalties: The taxable income is the amount of income per transaction, subject to progressive tax rates ranging from 3% to 45%. Among them, the income amount of remuneration for personal services and royalties is the balance of gross income after deducting 20% for expenses; the income amount of an author’s remuneration is calculated by deducting 20% for expenses from 70% of the gross income.
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