In a move that resulted in sighs of relief across many parts of China’s foreign expat communities, it has been announced by China tax authorities that tax exemptions across eight categories will be extended until 31 December 2023. The tax exemptions are for foreigners working in China and will cover housing rental costs, fringe benefits, language training costs, children’s education fees, and even more.
The news was announced on 31 December 2021 by the Ministry of Commerce (MOF) and the State Taxation Administration. The title of the subject matter was “Announcement on the Continuation of Implementation of Individual Income Tax Preferential Policies Such as Foreign Nationals’ Benefits.”
The original expiry date on preferential income tax, also known as IIT, which is the policy that covers the fringe benefits of foreigners in China, was set for 31 December 2021. The announcement has now moved that date forward 2 years. This move was off the back of another recent announcement where preferential tax policy for both Chinese and foreign workers alike was extended, which covered an annual one-time payment bonus, was also extended until the same date in December 2023.
What Do the Tax-Exempt Benefits for Foreigners Working China Cover?
Foreign workers in China who are Chinese tax residents can now take advantage of tax exemptions for the next two years that cover a wide range of things. There are eight categories in total that cover a wide range of issues pertaining to housing costs, fringe benefits, and more. Please see a full list below of the eight categories where the tax exemptions are extended for the stated time period.
- Housing rental costs.
- Child education expenses
- Language training costs
- Meal expenses
- Laundry costs
- Relocation costs
- Expenses for business travel
- Home leave costs
Expenses and costs of these eight categories will be reimbursed to foreign workers via non-cash payments. Reasonable expense requests from foreign workers with sufficient invoices and supporting documents for traveling in and outside of China will also be covered. Other tax extensions that cover expenses regarding language training and fees paid to educate your kids are also included. Just remember that all expenses are expected to be reasonable and will all be assessed by China tax regulators.
What is the Current Tax Policy in China?
Until the extended date of 31 December 2023, all non-Chinese domiciled tax residents, most notably those who do not have domiciles in China but have lived here for 183 days or more amidst a tax year, can now get one of these two tax benefit options:
The tax-exempt benefits-in-kinds, also known as BIKs; or
These six below additional itemized deductions:
- Expenses for Child education
- Ongoing child education costs
- Interest on housing mortgages
- Housing rental fees
- Medical and healthcare costs covering serious illness
- Expenses that cover taking care of the elderly
When it comes to the BIKs for foreigners in China that were expiring at the end of 2021, they will now become effective in 2023. However, the six additional itemized deductions will be constantly available for both Chinese and foreign tax residents that live here.
Please note: These two different policies cannot be chosen at the same time. They can’t run simultaneously. Once the foreign worker in China has made his/her choice, you cannot change those preferences during that same tax year.
More details on the current policy…
You can’t fully deduct your expat tax-exempt fringe benefits by expenditure alone. You will need to provide proof of the expenses and payments via invoices and that the amount is deemed ‘reasonable’ by the local tax authorities. They will decide by factoring in the local living costs and standards, market prices, and consumption levels. The expected proportion will be around 30% to 35% of the monthly salary of said expat workers to be ‘deemed reasonable’ by the authorities.
In regards to the itemized deductions, they are generally based on a fixed amount or a standard basis payment. This will not include healthcare costs that already have an RMB 80,000 yearly cap. If you are an expat with a high-level income and high expenses, these tax-exempt fringe benefits will be a godsend and will be much easier to absorb than when dealing with pre-tax itemized deductions.
Current One-Time Bonus Scheme (from now until the end of 2023)
The current one-time bonus scheme was supposed to end on 31 December 2022 but is now extended for a further two years. This scheme covers the Individual Income Tax (IIT) on a yearly one-time bonus that will still be calculated as a separate thing and then combined and taxed as part of the total income figure. The short and fall is that foreigners will pay less tax.
The scheme that was delayed until the end of 2023 that doesn’t now apply is as follows:
Tax payable = [Gross annual comprehensive income (including the annual one-off bonus) – annual individual’s portion of social security contribution – standard deduction – other deductions – annual additional itemized deductions] x Applicable tax rate – Quick deduction.
Who is Eligible for the ITT Tax Exemptions/Benefits?
The only people who will get relief and certain benefits-in-kind (BIKs) from PRC individual income tax (IIT) will be non-Chinese nationals or a person who has a passport from countries that are not China, Hong Kong, Taiwan, and Macau.
Who Benefits Most from the Extended China IIT Tax Fringe Benefits?
All of those foreign workers who live in China will benefit most. Companies that are retaining foreign talents will also massively benefit from the extended time period. If you are a foreign worker who pays high education fees for your kids to attend international schools in China, the extended policy will give you a sigh of relief.
The tuition costs to educate kids to high international standards in first-tier Chinese cities such as Shanghai and Beijing are anywhere between RMB 200,000 to 350,000 per annum. The additional itemized deduction costs on average for foreign tax residents in China is around RMB 1,000 per month. This can turn out to be much lower than the expenses that foreigners pay to educate their kids in China.
The tax-exempt fringe benefits can then be used to offset the high education costs for your child and will save you, the foreign employee, a massive amount of cash on taxes. This also has an advantageous effect on the well-being and growth of China’s international school industry.
Getting Prepared for Transition
Now you have a further grace period of nearly two years until the new taxation rates are implemented, you have lots of time to prepare for the transition. When the policy does finally change, it could cost foreign workers in China up to 13% of their net take-home pay. So you will need to get ready for a transition that could have a dramatic effect on your taxable income.
Foreign employees in China are advised to take a closer look at their employment and labor contracts to see if a restructured salary package that can soften the blow is possible. Learning these things early in the game with proper communication will make things clearer and avoid any potential issues arising from the policy changes.
There could be some cases where enterprises might need to compensate their foreign workers for the increase in taxation. This might not be such a problem for some larger multinational companies, but if small and medium level businesses (SMEs) are already struggling to cover these taxation payments for their expat workers in China, adjusting their current business model and hiring more locals might be the only viable solution.
Is it a problem same for larger multinational companies?
Large-sized multination companies, also known as MNCs, will probably have to increase their budgets to incorporate the increased taxation percentages for their foreign employees. However, it’s more likely that MNCs will alter their strategy slightly regarding hiring foreign workers in the future. It will be interesting to see how this pans out as we still have two years before the new policies come to fruition.
Although it’s great news that the taxation policy regarding IIT will be delayed until the end of 2023 and the start of 2024, now is the time to get prepared for the transition. You don’t want to leave it until the last minute whether you are a foreign worker in China or a company that hires foreign expats.