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26 January 20223 minute read

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

At the end of 2021, the Ministry of Finance (MOF) and the State Administration of Taxation (STA) released two 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 and annual one-off bonus have been extended to 31 December 2023 while the preferential tax policy on income from equity incentive schemes of listed companies has been extended to 31 December 2022. These policies were originally stipulated in Cai Shui [2018] No. 164 and were scheduled to end on 31 December 2021.

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.

Annual one-off bonus and income from equity incentive schemes of listed companies

Under Cai Shui [2018] No. 164, during the abovementioned 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.


Given the supposed expiry of the transition period in the Cai Shui [2018] No. 164, there had been considerable concern for employers, wondering if they will bear a heavier tax burden. The good news is that employers can get relief as the dust has settled for now and there is a further grace period, two years for tax-free fringe benefits for foreigners as well as annual one-off bonus and one year for equity incentives of listed companies. Nevertheless, the grace period is only a buffer for employers. If there are no new policies coming out, it is likely that employers will still need to re-visit the compensation structures of employees in the future and make necessary adjustments taking into account changes that affect employees’ take home pay. Employers are advised to monitor developments closely and get prepared beforehand.