SAT Notice clarifies several issues relating to individual income tax

The Notice Defining Precisely the Implementation of Several Policies for Individual Income Tax was published by the State Administration of Taxation (SAT) on 17 August 2009. The Notice sets out a number of clarifications or changes in the taxation of double pay, directors’ fees, overseas Chinese and housing transactions.

Double pay and bonuses

Article 1 of the Notice puts an end to the method of taxation of double pay which was set out in Article 1 of The Reply of The State Administration of Taxation on Several Policies for Individual Income Tax (Guo Shui Han [2002] No. 629).

Guo Shui Han [2002] No. 629 reiterated and formalized the method the SAT would apply in calculating double pay, which has been in effect since 1996. Under this method, individual income tax would be imposed separately on year-end pay rises and one-off bonuses received throughout a year, as if such payments were a discrete month’s income. In 2005, the method of taxation of double pay was revised to become an apportionment method under which year-end pay rises, one-off bonuses received throughout the year and performance-related pay would be added to monthly pay equally across 12 months in order to determine the applicable tax rate.