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IIT Calculation for Hong Kong and Macau Residents’ Mainland-Derived Income

In order to avoid ambiguities surrounding the double taxation of individuals working between Mainland China and the special administrative regions of Hong Kong and Macau, the State Administration of Taxation (SAT) issued the “Notice on Questions Regarding Tax Arrangements of Individual Employees Working in Both Mainland China and Hong Kong or Macau (SAT Notice [2012] No.16, hereinafter referred as ‘Notice’)” in April, clarifying the calculation of individual income tax (IIT) for related personnel.

Calculation of IIT
Income derived in Mainland China by a Hong Kong or Macau resident is subject to individual income tax in Mainland China under Article 1, Section 14 of the DTA between the mainland and the special administrative regions of Hong Kong and Macau.

The formula for calculation is:

  • IIT = [(Total Income – 4,800 – Quick Deduction) * (Days in China ÷ Days Total)

The income derived in the mainland by a Hong Kong or Macau resident is tax exempt under Article 2, Section 14 of the DTA if all of the following conditions are met:

  1. The presence of the person in the mainland does not exceed 183 days in any 12-month period (taxable period)
  2. The income is paid by, or on behalf of, a non-Chinese employer
  3. The income is not borne by a permanent establishment of the employer in the mainland

If the Hong Kong or Macau resident renders services both in the mainland and in Hong Kong or Macau, and the individual’s aggregate periods of stay in the mainland do not exceed 183 days, the income paid or borne by the mainland establishment is still subject to IIT in China, but IIT will be calculated according to chargeable income and time stayed in the mainland. The formula for calculation in such cases is:

  • IIT = [(Total Income – 4800) x Tax Rate – Quick Deduction] * (Days in China ÷ Days Total) x(Income in China ÷ Income Total)

IIT on bonuses
Individual income tax for one-time bonuses (such as salary increase, dividends) derived in the mainland that crosses different taxable periods for Hong Kong and Macau residents shall be calculated according to the taxable period in the mainland and the two above-mentioned formulas. The “days in China” refers to the aggregate days that person spends in China during the bonus period and “days total” refers to all the days during the bonus period.

Filing and reporting
Hong Kong and Macau residents bear the responsibility to report and file with the related tax authorities when paying IIT according to the DTA, and the required documents and process is guided by Article 5 of the “Notice of SAT regarding Questions about IIT Calculation and Payment of Individuals Who Have No Permanent Address within the Territory in China (guoshuihanfa [1995] No 125).”

The Notice will be effective from June 1, 2012, and the calculation methods will be applicable for incomes generated after June 1.

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