Continuing of Preferential Individual Income Tax (IIT) Policies for Employees in China

On 18 August 2023, the Ministry of Finance (MOF) and the State Administration of Taxation (STA) released three announcements extending several preferential policies on IIT, which are welcomed by employees.

In particular, the preferential policies on tax-exempt fringe benefits granted to foreign employees, annual one-off bonus and income from equity incentive schemes of listed companies have been extended to 31 December 2027.

TAX-FREE FRINGE BENEFITS FOR FOREIGNERS

Foreigners in China have been entitled to 8 categories of subsidies including (a) housing expense, (b) meal fee, (c) relocation expense, (d) laundry fee, (e) home leave expense, (f) business travel expense, (g) education expense for children and (h) language training expense for a long time. However, as the 2019 IIT Law introduced six special additional deductibles including expenditures for (a) education of children, (b) continuing education, (c) medical treatment of serious diseases, (d) housing loan interest, (e) housing rents and (f) support for elderly parents, in order to reduce the difference of tax treatments between local and foreign individuals, Cai Shui [2018] No. 164 put forward a three-year transition period from 1 January 2019 to 31 December 2021, allowing foreigners who are eligible as PRC tax residents (i.e., individuals who have domicile in China or do not have domicile in China but stay in China for no less than 183 days within a tax year) to elect to either (a) enjoy the six itemised deductions just like Chinese citizens or (b) continue to claim the previous tax-exempt fringe benefits. This policy was first extended to 31 December 2023 and re-extended to 31 December 2027 recently.

ANNUAL ONE-OFF BONUS AND INCOME FROM EQUITY INCENTIVE SCHEMES OF LISTED COMPANIES

Under Cai Shui [2018] No. 164, during the transition period from 1 January 2019 to 31 December 2021, PRC tax residents can pay the IIT on the annual one-time bonus and/or income from equity incentive schemes of listed companies separately, rather than combine the bonus and/or incentive into the comprehensive income. This policy was also extended to 31 December 2023 and re-extended to 31 December 2027.

IMPLICATIONS

The above policies will be implemented until 31 December 2027, which means that the IIT preferential policies will be extended for another 4 years, further reducing the burden on taxpayers. The extension of the transition period helps employers to arrange more reasonable salary payment methods. Employers are advised to monitor developments closely.