How will Individual Income Tax Law changes affect foreigners in China in 2022

Many foreign professionals living and working in China are concern on how the changes to the Individual Income Tax Law (IIT) will affect their earnings. Beginning on January 1, 2022, the preferential IIT policies offered to foreigners for almost three decades will come to an end.

In order to attract foreign talent to the country, China had offered in the past a series of expatriate allowances that will no longer be valid after year’s end. This will directly impact the taxable income of foreigners working in the region.

According to the new policy, the preferential treatment of the housing rental, children’s education expenses and language training, among others, would be discontinued.

 A foreigner working in China will no longer have access to the IIT exemption of housing allowances provided by the employer. Instead, if a foreigner has an address in China or does not have domicile but stays in the country for no less than 183 days within a tax year (“PRC tax resident”), same as other Chinese individuals, he/she can deduct housing rental as a special extra deductible item (“SEDI”) from his/her comprehensive incomes for IIT purposes.

The deductible amount is RMB 1,500, RMB 1,100 or RMB 800 per month, depending on the level and the population of the city of residence.

Similarly, Children’s education allowances which are usually provided by the employer as benefits, won’t be considered a tax exemption. Instead, if a foreigner is a resident, children’s education costs of RMB 1,000 per month can be deducted as a SEDI, when the children receive pre-school education (from 3 years old to primary school entry) or full-time degree education (from primary school entry to doctoral degree) in China.

Language training allowances will no longer be treated as exemptions. But if a foreigner participates in continuing educational programs, the costs can be deducted as SEDI, of RMB 400 per month and RMB 3,600 at the year in which the educational qualification certificate is obtained.

However, foreigners working in China may still access IIT exemptions for meal and laundry allowances, home leave allowances (usually two round trips between China and the individual’s home country per year) and relocation allowances in a certain amount. All these costs must be in “reasonable” amounts and backed up by the appropriate fapiao.

 

Since foreign taxpayers cannot simultaneously enjoy both the itemized deductions and the tax-exempt expatriate allowance, this means that foreign tax residents in China will likely only be eligible to claim itemized deductions (similar as Chinese nationals).
 
Some of these deductions include housing loan interest, RMB 1,000 per month for the first resident house within China bought through commercial housing loans or housing fund loans; medical treatment expenses incurred if the costs minus the compensation from the insurances exceed RMB 15,000 within one tax year, and the expense for support of elderly dependents (RMB 2,000 per month for dependents older than 60).

In addition, a foreigner working in China is no longer able to enjoy preferential IIT policy for annual bonus which used to be taxed separately from other incomes for IIT purposes. Instead, the annual bonus will be included in one’s comprehensive income together with other incomes.

Most foreign professionals working in China could receive in the past about 30% of their entire earnings as benefits so that they do not need to pay IIT for that part of income.

Although compared with the past, additional deductible items are added, since the amounts are small and some of them are not relevant to foreigners, the costs which can be deducted from the taxable income of foreigners will be reduced. This will significantly increase the tax burden of expatriates and impact their net incomes.

Many foreign companies are paying close attention to the changes to the IIT law, since this will substantially affect the policies on involving and retaining foreign employees in Chinese business in the future.

Some Chambers of Commerce in China have been lobbying the Chinese government to try to cancel the implementation of the new IIT policies, however nothing has changed for now.

There are a few actions companies can take before the changes become effective in January 2022, such as to evaluate the potential impact of the new IIT policies and communicate it with foreign employees in a timely manner to manage their expectations of net income.

Firms can also adjust the remuneration structure to reduce the overall tax burden, if necessary, as well as revisit the company's compensation policy and make corresponding adjustments according to changes in regulations.

No matter whether foreign employees are hired locally or abroad, under Chinese law, when any remuneration structure needs to be changed, a written employment contract or amendment agreement must be concluded between the employee and the employer.

These actions can be taken in advance since there are just a few months of the year left and companies will have little to no time to adjust their employees benefit policies before the IIT changes are implemented.

Both companies and individuals should carefully consider in advance the possible consequences of the alterations and prepare for 2022, remaining up to date on policy announcements, reviewing labor contracts, ensuring correct company budgeting and evaluating the availability and eligibility for existing financial subsidies (incl. preferential policies in areas such as the Greater Bay Area and Lingang New Area in the Shanghai Free Trade Zone).

 

It should be noted that the Chinese authorities will generally announce policies or provide Implementation Guidelines in relation to major pending policy alterations. As of this moment, such further guidance from the Chinese State Administration of Taxation has not yet been provided but could be expected around Q4 of 2021.
 
The Chinese authorities will generally grant the public the availability to comment on major policy changes and as such it is encouraged for companies employing foreign individuals to contact their local tax officer on these matters.


To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.

DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.