Two Extensions Policies on IIT in China
On August 18, 2023, the Ministry of Finance and General Administration of Taxation released two announcements in order to reduce the burden on taxpayers in China. One is that all individual taxpayers can continue to enjoy the preferential tax rate for the annual one-time bonus; the other is that expatriates working in China can continue to enjoy tax exemption on allowances, including housing rental, children’s education costs, and language training costs, for another two years, till December 31, 2027.
The extension has brought immediate relief to some higher-earning expatriates. Some of them, especially those who bear the high cost of educating their children, would have seen a surge in their personal tax liability.
- Announcement – Annual One-time Bonuses
If a resident individual obtains an annual one-time bonus and meets the provisions of the «Notice of the State Administration of Taxation on Adjusting the Method of Calculating and Levying Individual Income Taxes on Annual One-off Bonuses, etc. Obtained by Individuals», the income from the annual one-time bonus will not be combined into the comprehensive income of the current year, and the applicable tax rate and quick-deduction number will be calculated separately and the tax will be determined by the income of the annual one-time bonus divided by the number of months. Determine the applicable tax rate and the number of quick deductions in accordance with the monthly converted comprehensive income tax rate table attached to this announcement, and calculate the tax separately.
The formula is as follows:
Taxable Amount = Gross Bonus x Special tax rate – Accelerated deductions
Of course, taxpayers can also choose to merge the annual bonus into the comprehensive income (together with salary) of the current year to calculate individual income tax. At the time of Annual IIT Filling in the following year, taxpayers can have the opportunity to reconfirm the declared data.
- Announcement – Expatriates’ Allowances
If an expatriate meets the conditions of a resident individual, he or she can choose to enjoy the special additional deduction for individual income tax (as all Chinese has been applied since 2019) or choose to follow the implementation of the «Circular on Some Policy Questions Concerning Individual Income Tax», and the «Notice of the State Administration of Taxation on the Implementation of Exemption of Individual Income Tax on the Relevant Subsidies Obtained by Foreign Individuals», enjoy tax exemptions for allowances such as housing rents, language training fees, children’s education fees, etc., but not at the same time. Once an expatriate individual has made an election, he or she may not change it within one tax year.
Such allowances could be exempt 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 the travel expenses for the expatriate from China to their/spouse’s home country for up to two trips per year could be exempt from IIT.
Other things to note are that although the “benefits” are extended, the nature of your taxpayer in China still needs to be taken care of. As of 2019, if you’re about to become a domiciled taxpayer, you’ll need to declare all your worldwide taxes in China. If this is a future situation, then preparing in advance must be necessary.
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