IIT in China: Tax Benefits for Foreign Residents Extended

Just before the new year came around the corner, China released a last-minute announcement to postpone the planned changes of the individual income tax (IIT) that were about to be implemented from January 1^st, 2022 – changes that were expected quite nervously by companies and their foreign employees, since they would lead to a significant strain of tax exemption benefits enjoyed so far. Yet with the postponement of these changes until 31^st December 2023, there is now more room to breathe, and also to prepare. Let’s have a closer look at how the changes affect companies and how to prepare efficiently.

Taking Advantage of the Benefits until December 2023

The two most important IIT policies whose change had been postponed are the fringe benefits for foreign residents and the preferential tax treatment of the annual bonus – two good opportunities for creating tax-efficient salary structures, especially for expats with a higher income.

Fringe benefits for foreign employees provided by the company encompass the following categories:

• Chinese social security insurances
• Allowances for meals, laundry, relocation and housing
• Home-leave of the expat with up to 2 round-trips per year
• Fees for Chinese language training
• Tuition fees for the education of the expat’s children

Those benefits can be exempt from the IIT with the premise that a) they don’t exceed about 30-40% of the gross base salary, b) the benefits need to be provided on a non-cash or reimbursement basis for which a Fapiao, an official tax receipt, is needed.

The annual bonus under the current policy can be taxed with two different methods: it can either be calculated separately or taxed along with the annual comprehensive income. The first and more beneficial option for middle- and higher-income groups has now been extended together with the fringe benefits. It is an additional opportunity to reduce IIT burden for both Chinese and foreign employees.

For a detailed dive into the Chinese IIT and insights how to create the most tax-efficient salary structure, check out part 1 and part 2 of our Chinese IIT series.

The Changes and Effects to Come

Let’s have a look at the consequences that a change of these preferential policies would have for employers and employees – maybe this perspective can give us also an idea on the possible reasons of its postponement.

With the changes, the fringe benefits are substituted by additional itemized deductions. Different to the fringe benefits, they cannot be fully deducted based on the cost of the expenditure, but are based on a standardized amount, independent from salary and actual costs. For many higher-income foreign professionals, the fringe benefits are therefore way more efficient. Instead of enabling a full deduction of expenses such as housing or tuition fees of children, the fixed amount of the additional itemized deductions covers for them only a very small sum of the actual expenses. The amount of tax will thus increase significantly, and the net salary of employees shrinks suddenly with this new implementation.

Help, will my foreign employees soon take off in the next airplane? This question might be on the mind of some employers, even if for now the changes lie a little less than two years in front of us. However, it is important to keep a close eye on the changes of China’s IIT polices and use this additional time to prepare. It is advisable to develop a strategy and react to the destabilizing effects that this change might have on companies’ staff. To avoid surprises, it is crucial to discuss and explain the policy changes to affected employees and negotiate how to address this issue together. Here are some points to consider:

1. One possibility is to adjust the wages in a way that the gap from the tax burden for the employee is covered or eased. However, the company must think about the increasing personal costs that derive from that strategy.
2. Another option can be to hire local professionals in case that foreign employees decide to leave.
3. Lastly, it is important to seek professional advice how to handle foreign residents’ tax planning in the future and establish the most efficient restructuring of salary terms.

This extension of beneficial tax policies shows that China is tackling the downward pressures that the economy faces. While a variety of economic challenges such as the outbreak of the Delta variant, issues of power cuts and the Evergrande crisis are faced, the government tries to support a more stable business environment as a response. Providing relief to businesses, especially SME as important contributors to China’s economy, is thus a crucial strategy to strengthen the economy. This also concerns foreign companies, since foreign trade and investment is another important component to that goal.