In general, China residents are taxed on their China-source and non-China-source income. Nonresidents are only taxed on income derived from China. In addition, nonresidents engaged in business activities with a substantial economic presence in China are taxed on the income attributable to their permanent establishment (PE) inside the country.
Effective from 1 January 2019, China residents include the following persons:
- Individuals who have their domicile in China
- Individuals who do not have their domicile in China, but reside in China for 183 days or more in a tax year
China's tax law system says that the income of any natural person who lives in China is taxed, unless otherwise specified. Employment income, labor services income, copyright income, and royalties should be consolidated as annual income for China residents. The China IIT law includes, but is not limited to, the following types of taxable compensation:
- wages and salaries
- foreign service or hardship allowances
- cost of living and automobile allowances
- tax reimbursements
- equity compensation.
Individual income can take any form, including cash, physical objects, securities, and economic interests. Included in taxable income are compensation for independent personal services rendered in China, bonus payments, and income designated by the Ministry of Finance as taxable.
Residents' income tax is computed on a monthly basis using the progressive annual tax rates shown below, applied to their employment income using the cumulative withholding method.
Effective 1 January 2019, employment income is accumulated for the purpose of calculating China residents' monthly tax liability.