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Last-minute extension of non-taxable benefits and preferential tax policies in China

News Fidinam Shanghai

In the very last week of 2021, the Chinese Government promulgated two official announcements concerning the treatment of non-taxable benefits for foreign professionals and the preferential tax policy on annual bonuses. 

Respectively on December 29 and December 31, 2021, two major official announcements were made by the State Council, and by the Ministry of Finance (MoF) and the State Administration of Taxation (SAT). The first notice concerns the prolongation of some preferential individual income tax (IIT) policies; the second notice was about the (long-awaited) “Continuation of the Preferential Policies on Individual Income Taxes for Foreign Personal Allowances and Subsidies”.

Below we will analyze the features and implications of both announcements.

With the notice of December 29, the Government intended to further reduce the burden of individual income tax and relieve the pressure for low- and middle-income taxpayers’ categories. The ways in which that is achieved are:

  1. The annual one-off bonus can still be separated from the comprehensive income for tax calculation purposes. The implementation of a separate taxation policy for an annual bonus is extended until the end of 2023.
  2. Supplementary individual income taxes that must be paid when completing the annual IIT filing can be exempt for the amount not exceeding RMB 400. This policy is also applicable for those whose annual income does not exceed RMB 120,000. This preferential tax treatment is extended until the end of 2023 as well.
  3. Preferential tax policies are extended for equity-based incentives of listed companies until the end of 2022.

The three policies mentioned above are expected to reduce taxes by RMB 110 billion a year. More in general, the separate treatment of the annual bonus can reduce the overall tax burden businesses and individuals will face from 2022 onwards.

On December 31, 2021, festivities for the new year aside, there was another highly unexpected reason to rejoice. The official notice from MoF and SAT on the “Continuation of the Preferential Policies on Individual Income Taxes for Foreign Personal Allowances and Subsidies” released that day was probably the most welcomed regulatory update for foreign employees and employers in China throughout the entire year of 2021. 

The Announcement [2021] no. 43 stated that the non-taxable fringe benefits for expatriates will maintain their tax-free status for at least two more years, so until the end of 2023.

Previously, Announcement [2018] no. 164 issued in 2018 stated that foreign employees working in China could only enjoy the preferential tax-exemption policies for housing subsidies, language training expenses and children’s education expenses until the end of 2021.

This Announcement [2021] no. 43 revised the above-mentioned provision and extended the implementation of the preferential policy on tax-free allowances and subsidies for foreign individuals until the end of 2023.

The issuance of this policy is a significant (and much appreciated) benefit to expatriates in China, essentially meaning that their tax burden will remain unchanged for the next two years. Furthermore, it was previously anticipated that the costs for businesses employing foreigners who enjoy tax-exempt benefits would increase (given that the Announcement [2018] no. 164 was due to expire on December 31, 2021); however, the recent Announcement [2021] no. 43 implies no increase in tax burden for employers as a result.

Overall, although many companies had probably already renegotiated the contracts with their key foreign employees in China, these recent updates give a good 2-extra-years breather, from a financial perspective to all companies employing foreign professionals in China. It might be necessary for employers and employees to sit down once again to rediscuss some terms, but this last-minute extension of preferential tax policies remains much appreciated.

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