Good News for Businesses and Expats in China
At the end of 2021, the State Council announced that it would be extending preferential Individual Income Tax (IIT) policies for foreign workers for another 2 years. This will come as great news for businesses that hire foreign workers and expats currently in China as these policies were originally due to expire on 31 December 2021.
The extension will mean that the policies will expire on 31 December 2023, allowing foreigners to continue enjoying tax exemptions on eight categories.
What Are the 8 Categories Foreigners Can Enjoy Tax Exemption Benefits?
Foreign workers can enjoy tax-exempt benefits in the following categories:
- Relocation expenses
- Business travel expenses
- Home leave expenses
- Housing rental expenses
- Education expense for children
- Language training expenses
- Meal fees
- Laundry fees
These benefits, also known as benefits-in-kind (BIK), are exempt from IIT providing there are supporting documents for the expenses and the specific requirements are met for each category.
PRC Tax Residents Also Benefit from Extension of Preferential IIT Policies on Annual Bonus
To help reduce the burden of personal income tax, the State Council has decided to continue with the implementation of preferential individual income tax policies. Policies include:
- Not incorporating one-time annual bonuses into monthly salary income, implementing separate monthly taxation until December 31st, 2023.
- Individuals with an annual income of not more than 120,000 yuan shall not need to pay more than 400 yuan for the annual final tax payment till December 31st, 2022.
- Separate tax calculation policy for equity incentives granted by publicly listed companies will be extended till December 31st, 2022.
Calculating the Annual One-Time Bonus
There are two tax calculation methods for employees that receive an annual one-time bonus:
- Year-end bonus is not included in the comprehensive income for the year and is calculated separately:
- Tax Payable on Annual Bonus = Taxable Annual Bonus Amount X Applicable Tax Rate – Quick Deduction
- Combine the annual year-end bonus with the comprehensive income for the year and calculate the tax together:
- Tax Payable = [Gross Annual Comprehensive Income (Includes Annual One-Off Bonus) – Annual Individual’s Portion of Social Security Contribution – Standard Deduction – Other Deductions] X Applicable Tax Rate – Quick Deduction
The method of calculation selection will vary from person to person depending on the size of their year-end bonus compared to their total annual salary.
| Grade | Annual Taxable Income (RMB) | Tax Rate (%) | Quick Deduction Amount (RMB) |
|---|---|---|---|
| 1 | ≤36,000 | 3 | 0 |
| 2 | 36,000 – 144,000 | 10 | 2,520 |
| 3 | 144,000 – 300,000 | 20 | 16,920 |
| 4 | 300,000 – 420,000 | 25 | 31,920 |
| 5 | 420,000 – 660,000 | 30 | 52,920 |
| 6 | 660,000 – 960,000 | 35 | 85,920 |
| 7 | 960,000 | 45 | 181,920 |
Source: chinatax.gov.cn
Separate Vs Combined Tax Methods
Example A – Total Annual Salary > Year-End Bonus:
Individual A has a taxable income of 150,000 yuan in 2021 and a year-end bonus of 30,000 yuan.
- Separate tax calculation will mean the year-end bonus will be subject to a tax deduction of 900 yuan.
- Combined tax calculation will result in a tax deduction of 6000 yuan from the bonus.
Example B – Year-End Bonus > Total Annual Salary:
Individual B has a taxable income of 30,000 yuan in 2021 and a year-end bonus of 270,000 yuan.
- Separate tax calculation will mean the year-end bonus will be subject to a tax deduction of 52,590 yuan and a salary tax of 900 yuan, totalling 53,490 yuan.
- Combined tax calculation will result in a tax deduction of 43,080 yuan overall.
Want to Know More on How These Policies Can Affect Your Business?
Still finding it difficult to understand tax rates in China? If you would like to know how the extension of preferential IIT policies can affect you and your employees or you are looking to understand the tax calculations better, contact our team now! To keep up with the latest labour law, tax and compliance updates subscribe to our blog and check out our events page for the latest webinars!
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