China has extended its preferential individual income tax policy for foreign professionals living and working in China until 31 December 2027 (previously set to end on 31 December 2023)
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 (i.e., travel to home country)
These benefits are usually not included in the salary and wages but are paid on a reimbursement and non-cash basis. They can be exempted from IIT provided that the expenses are reasonable in amount and there are corresponding supporting documents, such as invoices (fapiao), for each expense. In addition, there are some specific requirements for each category. For example, for home leave expenses, only two trips per year for the expat from China to their or their spouse’s home country can be exempt from IIT.
Many analysts were confident that the policy would be extended beyond the previous deadline of 31 December 2023, especially since the economy is showing signs of a slowdown and the government is attempting to reduce the tax burden on the middle classes to encourage consumer spending. Nevertheless, the extension has come as a relief for foreign workers, who would have seen their personal tax burden increase significantly, especially in terms of the cost of educating their children (tuition fees at international schools in first-tier cities can be up to £38,000 per year). It will also benefit companies trying to increase their hiring of foreign talent now that China’s borders are fully open post-Covid.
What does this mean for companies operating in China?
Overall, these policy extensions are likely to benefit companies in China, as it may help them to attract and retain new talent. It will also been seen as a positive move by the international education sector, as it means that foreign professionals in China will likely continue 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
