OVERVIEW OF CHINA INDIVIDUAL INCOME TAX

(1) Taxpayers

Any individual who has domicile in China or who has no domicile in China but has resided in China for one year or more shall pay Individual Income Tax on his world-wide income. Any individual who is neither domiciled nor resident in China or who has resided in China for less than one year shall pay Individual Income Tax on the income from sources inside China.

(2) Taxable items and calculation of Individual Income Tax payable

a. Wages and salaries

Wages and salaries are taxed on the basis of the balance of taxpayer' s monthly wages and salaries after lump-sum deduction of 800 yuan as expenses and by applying the nine-grade progressive rates as shown in the table below.

Individual Income Tax Rates Schedule (1)

The formula for computing the amount of tax payable is:
Monthly taxable income = Monthly aggregate wages/salaries - 800 yuan
Monthly amount of tax payable = Monthly taxable income ×Applicable rate - Quick deduction

The taxpayers who have no domiciles in China but earn wages and salaries from China or who have domiciles in China and earn wages and salaries from outside China may enjoy additional expense deductions (currently 3200yuan per month) in addition to the regular monthly deduction of 800 yuan in computing the taxable income.

b. Individual household production or business operation income
With respect to the individual household production or business operation income, the amount of tax payable is computed on the basis of the balance of the gross annual production and business operation income after deduction of the related cost, expenses and losses and by applying the five-grade progressive tax rates as listed in the table below.

Individual Income Tax Rates Schedule (2)

The formula for computing the tax payable is:
Annual taxable income = Gross annual income of production /business - Costs,expenses and losses
Tax payable for the year =Annual taxable income ×Applicable tax rate - Quick deduction

c. Income from contracted or leased operation of enterprises or institutions The income from contracted or leased operation of enterprises or institutions is taxed on the basis of the balance of the gross annual income after deduction of the necessary expenses (currently 800 yuan per month) and by applying the suitable tax rate in Individual Income Tax Rates Schedule(2) above.

d. Remuneration for personal service, author' s remuneration, royalties, income from lease of property

The income of remuneration for personal service, author's remuneration, royalties and income from lease of property are taxed on the basis of remaining sum of the income after deduction of 800 yuan when each payment of the income is not over 4,000 yuan or on the basis of the remaining sum of the income after deduction of 20% of the income as the expenses when each payment of the income is over 4,000 yuan and by applying the rate of 20%. The formula for that is:
Taxable income= Cross value of taxable items - 800 yuan (or 20% of gross value of taxable items)

Amount of tax payable = Taxable income × 20 %

e. Income from transfer of property

The tax base is the balance of the proceedings derived from transfer of property after deducting the original value of the property and the reasonable expenses The applicable rate is 20%. The formula for computing the amount of tax payable is:
Taxable income = Proceedings from transfer of property - Original value of property - Reasonable expenses

Amount of tax payable = Taxable income × 20 %

f. Interests, dividends, bonuses and contingent income
The tax on interest, dividends, bonuses, contingent income and other income is based on each receipt of the income with the rate of 20%. The formula for computing the income tax payable is:

Tax payable = The full amount in each receipt ×20 %

(3) Main tax exemptions

The following income are exempt from income tax:

a. Awards for achievements in science, education, technology, culture, public health, physical culture and environmental protection granted by the Provincial People' s Governments, Ministries and Commissions under the State Council, China's People's Liberation Army Units at army level and above and by foreign and international organizations;

b. Interest income on saving deposits, interest income on National Bonds issued by the Ministry of Finance and interest income on financial bonds issued upon approval by the State Council;

c. Special governmental allowances provided in accordance with the uniform regulations of the State Council and the subsidies and allowances stipulated as being exempt by the State Council;

d. Welfare benefits, survivor's pensions and relief payments;

e. Insurance indemnities;

f. Military severance payment and demobilisation payment received by members of the armed forces;

g. Settlement payment, severance payment and retirement payment received by public servants and workers under the uniform provisions of the State;

h. Medical insurance pension and the basic retirement pension saved and withdrawn according to relevant rules;

i. Income derived by diplomatic agents and consular officers and other personnel who are exempt from tax under the provisions of the relevant Laws of the People's Republic of China;

j. Income exempt from tax as stipulated in the international conventions to which Chinese Government is a party and in the agreements it has entered into.