PRC Preferential IIT Treatments Extended to the End of 2023
Pursuant to Announcements No. 42 and No. 43 of 2021 of the Ministry of Finance (“MOF”) and the State Tax Administration (“STA”), China will continue to implement several preferential individual income tax (IIT) policies until the end of 2023, mainly related to the following items:
- One-time annual bonus
- Tax-free benefits-in-kind for expatriates
- Equity-based compensation
The extension of preferential IIT treatment on annual bonus is aimed to alleviate the IIT burden on China’s middle-income groups considering the current downward economy brought by the Covid19. ,Besides, to continue the tax-free benefits-in-kind for expatriates working in China, could keep the employers from affording higher labor costs and attract more high-end overseas talents.
Previously since 1 January 2019, overall implementation of IIT Reform has been launched in China. Along with the reform, for certain preferential IIT policies, the MOF and STA jointly announced the Cai Shui [2018] No.164 (Circular No. 164), to introduce 3-Year’s transitional policy related to annual bonus, tax-free benefits-in-kind for expatriates, etc.
We would like to elaborate the detailed policies regarding the three items one by one for your better understanding.
- One-time annual bonus
Pursuant to Circular No. 164, from 1 January 2019 to 31 December 2021, taxpayer could choose to include annual bonus into the current year’s comprehensive income; or to use a specific formula to compute IIT. (i.e., to divide the annual bonus by 12 and apply monthly tax rate and quick deduction to calculate IIT separately). Starting 1 January 2022, all tax residents who obtain annual one-time bonus will have to combine their annual bonus with the yearly comprehensive income for computation and payment of IIT.
- Tax-free benefits-in-kind for expatriates
Pursuant to Circular No. 164, from 1 January 2019 to 31 December 2021, expatriate employees can choose to enjoy: the tax-free benefits-in-kind (including eight categories, i.e., housing expense, education expense for children, language training expense, meal fee, laundry fee, relocation expense, business travel expense and home leave expense); or the additional itemized deductions (including children’s education expenses, continuing education expenses, housing mortgage interest or housing rent, healthcare costs for serious illness, expenses for taking care of the elderly) if they are treated as China tax residents. Starting 1 January 2022, expatriate employees will no longer enjoy preferential tax-exemption policies on benefits-in-kind, including housing, language training, and children’s education. For expatriate employees who can be treated as China tax residents, the three categories of benefits-in-kind will be replaced by the corresponding additional itemized deductions (i.e., housing rent, continuing education expenses, and children’s education expenses). And they are also entitled to other additional itemized deductions.
- Equity-based compensation
Pursuant to Circular No. 164, from 1 January 2019 to 31 December 2021, If the equity-based compensation obtained by a tax resident individual meets the conditions according to the relevant circulars, the compensation can be separately applied at the full amount and adopting the tax rate table of comprehensive income. If a tax resident individual obtains two or more payments of equity-based compensation in a tax year, the compensations shall be combined and aggregated for tax calculation. Starting 1 January 2022, the policy for equity-based compensation after January 1, 2022 is to be clarified separately.
Should you have any questions or if you would like to know more about tax developments in China, please feel free to contact Sunny.chen@mazars.cn
By: Sunny Chen, Tax Director at Mazars Guangzhou