Clarification on Enterprise Annuity and Occupational Pension

By Season Hu, ECOVIS Ruide China

In March 2014, The Ministry of Human Resources and Social Security (“MHRSS”) printed and distributed the interpretations on the policy . Previously, the Ministry of Finance (“MOF”), MHRSS and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2013] No. 103, , which was effective from January 1, 2014. Enterprise annuity is expected to play an important role in encouraging diversified retirement savings, and provides for tax planning opportunities in the design and establishment of Annuity plans.

Interpretation on Enterprise Annuity

Enterprise annuity refers to the supplementary pension insurance system voluntarily established by enterprises and their employees beyond the purchasing of a basic old-age pension. The flow chart is as follows:

Treatment of the IIT on enterprise annuity refers to the three perspectives below：

Firstly, no IIT is required for the part of enterprise annuity temporarily.

For the part of enterprise annuity and occupational annuity paid by enterprises for their overall employees according to measures and standards stipulated in related national policies and regulations, no individual income tax is required to be paid by individuals temporarily when including the part into individuals’ accounts.

Secondly, it could be temporarily deducted for the part of individual annuity not exceeding 4% of taxable salary.

For the part of annuities paid by individuals according to relevant policies of the State that does not exceed 4% of the tax base of taxable salary, it shall be temporarily deducted from the current taxable income. The tax base of individual salary contributed to enterprise annuity shall be the average monthly salary of the individual for the last year. The average monthly salary is calculated based on the items listed for computation of gross wage according to provisions of National Bureau of Statistics of China. For the part of average monthly salary in excess of 300% of the average monthly salary of the city with districts (where the employee works) for the last year, it shall not be included into the contribution base of individual salary.

Thirdly, the part exceeding the standard was required for IIT

For any part, either paid by entities or by individuals, exceeding the annuities required to be paid, it shall be incorporated into current income from individual salary or wage and shall be subject to individual income tax in accordance with the law. The taxes concerned shall be withheld by the entities establishing the annuities, and shall be declared and paid to competent tax authorities.

Companies that establish approved Plans and Custodians of the Plans are obliged to withhold IIT at the time when the contributions are made /deducted and when payouts are distributed. Meanwhile, enterprise shall, at the time of filing annuity plans, submit the Application Form of Filing of Deferred Tax Payment Registration of Individual Income Tax on Enterprise Annuity and Occupational Annuity Plans and submit the filing information and relevant custody administration contracts.

Our observations and suggestions

The new rules under Circular 103 will not only defer the point of taxation of contributions made under a plan to the time of the payout, but also lower the eventual IIT burden on employees to a certain extent. In view of this, it provides for tax planning opportunities in the design and establishment of Annuity plans. We recommend the enterprises in attention understand the changing policy on time and make preparations for the establishment of annuity plan; meanwhile, the enterprises involved should submit to competent tax authority all documents pertaining to the Plans and the Letter of Registration Confirmation and Approval issued by the MHRSS in respect of the Plans.

What can we help?

Our professional consulting team and personnel can offer you consulting service of the above mentioned contents. The services include:
– Give you the interpretation of the regulation related to this policy,
– Analyze the influence and effects of this policy for your enterprise according to the actual situation.
– Help the enterprise to enjoy the benefits from the policy, reduce the unnecessary losses which caused by the misunderstanding of the new policy.

For more detailed information, please contact our professional team.