China extends individual income tax benefits for expats until 2023

China has extended its preferential individual income tax policy for foreign professionals living and working in China until 31 December 2023. A series of exemptions and allowances, including housing rental and children’s education, were previously set to change on 1 January 2022

The extension of the individual income tax (IIT) preferential policies means that non-China domiciled tax residents (i.e., people who do not have a domicile in China but live for 183 days or more in China in a given tax year) can continue to enjoy tax exemptions on eight categories:

• Housing rental
• Expenses for children’s education
• Language training expenses
• Meal fees
• Laundry fees
• Relocation expenses
• Business travel expenses
• Home leave expenses

The policy extension has brought immediate relief for some foreign workers, who would have seen a significant increase in their personal tax liability, especially in terms of the cost of educating their children. Companies trying to hire and retain foreign talent will also benefit from this policy.

This extension of IIT benefits for foreign professionals followed another announcement on 29 December 2021 in which China extended preferential treatment for annual one-time bonuses until the end of 2023. Under this scheme, IIT on annual one-time bonuses is calculated separately, rather than being combined and taxed together with overall income.

The extension of this policy is aimed to reduce the tax burden of middle-income groups at a time when the Chinese economy has been showing signs of a slowdown. For example, the following groups are expected to benefit the most from separate IIT on bonuses: (1) employees with an annual one-time bonus no less than RMB36,000; (2) employees with an annual income (annual bonus + annual salary – social security payments and various deductible expenses) no less than RMB 96,000; and (3) employees with an annual salary higher than their annual one-time bonus

What does this mean for companies operating in China?

Overall, these policy extensions are likely to be of benefit for companies in China, as it may help them to attract new talent. It is also a positive outcome for the international education sector, as it means that foreign professionals in China may no longer need to reconsider sending their children to pricey international schools.

Nevertheless, companies that made preparations for the original tax income policy change, such as amending labour contracts, restructuring salary packages, and reshuffling staff allocations, may need to roll back the decisions for the time being and save their plans for possible future needs.

Portions of this article first appeared in Dezan Shira & Associate’s China Briefing