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New Tax Treatment of Commercial Pensions-China

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On 2 April 2018, Circular No. 22 was issued announcing a new pilot program for the deferred tax treatment of commercial pensions for individual income tax purposes. This circular applies from 1 May 2018 to 1 May 2019 for the residents of Shanghai, Fujian province, and Suzhou Industrial Park in China.

Contributions to a commercial pension fund are deductible for individual income tax purposes. It should be noted that the deduction limit is 6%, or CNY 1.000 per month, for individuals receiving wages, salaries, and remuneration for labor services. For individual business owners, sole proprietors, partners of a partnership, and other sole traders, the deduction limit is 6%, or CNY 12.000, on an annual basis.

A list of pension insurance products eligible for the tax deduction will be published by the relevant government departments and a centralized digital platform will be set up by the CBIRC for documentary proof for taxpayers who contribute to this pension plan to claim the tax deduction.

The investment income accrued to the personal account of a commercial pension fund is not subject to personal income tax for the period of contribution. When an individual receives pension payments, only 75% of the payment is subject to individual income tax at a flat rate of 10%; the remaining 25% is tax exempt provided that the annuity is for more than 15 years.

In case of accidents and disabilities provided for in insurance policies where lump-sum payments are made, exceptions can qualify. The individual income tax on 75% of the pension payments must be withheld by the insurance company. Individuals who derive income from more than one source may apply the deduction only once and are allowed to choose where the deduction applies.

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