Foreigners working in China can continue to enjoy tax exemption on eight categories of fringe benefits, including housing rental, children’s education costs, and language training costs, for another two years, till December 31, 2023.
On December 31, 2021, New Year’s Eve, the Ministry of Commerce (MOF) and State Taxation Administration (STA) released the Announcement on the Continuation of Implementation of Individual Income Tax Preferential Policies Such as for Foreign Nationals’ Benefits (MOFCOM STA Announcement  No.43).
The Announcement officially extended the preferential individual income tax (IIT) policy on foreigners’ fringe benefits, which was set to expire on December 31, 2021, for another two years to December 31, 2023.
This came shortly after China extended another preferential tax policy, for the annual one-time bonus of both foreign and Chinese individuals, to the same date – December 31, 2023.
The MOFCOM STA Announcement  No.43 has brought immediate relief to some higher-earning foreign workers. Some of them, especially those who bear the high cost of educating their children, would have seen a surge on their personal tax liability.
What are the tax-exempt benefits for foreigners working in China?
Foreign individuals working in China can enjoy tax-exempt benefits on the following eight categories:
- Housing rental expense
- Education expense for children
- Language training expense
- Meal fee
- Laundry fee
- Relocation expense
- Business travel expense
- Home leave expense
These benefits are technically known as benefits-in-kinds, or BIKs – which refer to additional perks not included in the salary and wages but paid on reimbursement and non-cash basis.
Such BIKs 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.
For example, Chinese tax bureaus may require rental agreements, valid commercial invoices, and other supporting documents to be submitted when the foreigner file the IIT returns before waiving the tax on the foreigner’s housing rental expense.
In addition, there are some specific requirements for each category. For example, for home leave expenses, only the travel expenses for the expatriate themself from China to their/spouse’s home country for up to two trips per year could be exempt from IIT.
What is China’s current income tax policy?
Till December 31, 2023, non-China domiciled tax residents (who do not have a domicile in China and live for 183 days or more in China in a given tax year) are entitled to one of the two tax benefits:
- The tax-exempt benefits-in-kinds (BIKs); or
- The six additional itemized deductions:
a) Children’s education expenses
b) Continuing education expenses
c) Housing mortgage interest
d) Housing rent
e) Healthcare costs for serious illness
f) Expenses for taking care of the elderly
(The foreigners’ BIKs, which were due to expire at the end of 2021, will be effective till the end of 2023, while the six additional itemized deductions are consistently available for both foreign and Chinese tax residents in China.)
The two policies cannot be simultaneously enjoyed. Once decided, the foreign tax resident in China cannot change their preference within a given tax year.
Expatriates’ tax-exempt fringe benefits can be fully deducted based on the actual cost of each expenditure, provided it is a “reasonable” amount and accompanied by a corresponding invoice or other proof of payment. The “reasonable amount” is judged based on the local living standard, consumption level, market price, etc. In practice, a proportion below around 30 to 35 percent of the expat’s monthly salary is regarded as “reasonable” by Chinese tax authorities.
However, most additional itemized deductions (except for healthcare costs, which are deducted based on actual expense with a cap at RMB 80,000 a year) are deducted based on a standard basis – namely on a fixed amount.
For many expatriates who have a higher income and level of expense, the tax-exempt fringe benefits are considered more beneficial than the pre-tax additional itemized deductions.
Who will benefit from China’s extended tax policy on foreigners’ IIT fringe benefits?
All foreign individuals working in China as well as companies trying to retain foreign talents will benefit from the extended preferential tax policy.
Foreigners facing a high cost of educating their children as well as international schools may especially welcome the policy extension.
In China’s first-tier cities like Beijing and Shanghai, a single foreign child’s tuition fee at an international school can be anywhere between RMB 200,000 to RMB 350,000 per year. The additional itemized deduction standard for children’s education fees for tax residents in China is RMB 1,000 a child per month – this can be a much smaller amount than the foreigner’s actual expenses for children’s education.
Now, with the continually effective tax-exempt fringe benefit to offset the high cost of children’s education, the foreign employee can save a fortune on taxes. And this is also positive for the international school sector in China.
Making new HR and payroll policy adjustments
Companies with foreign employees who are already enjoying or are eligible to enjoy the tax exemption on some BIKs may need to communicate with their employees to arrange some benefits that are in line with current policies to help their foreign employees save tax.
For some companies which are not qualified to arrange BIKs for their employees – for example, those who have poor tax records and have been denied this right, they may instead consider helping their foreign employees with China tax residency to claim the six additional itemized deductions.
Companies that made preparations for the original tax income policy change (such as amending the labor contracts, restructuring the salary packages, and staff allocation) may need to rollback the decisions for the time being and save the plans for possible future needs.
With a large professional team of HR and payroll experts located throughout China, Dezan Shira & Associates has been providing professional HR, payroll, and tax advisory services as well as China individual income tax briefing for our clients. For more information and assistance, you are welcome to contact us at China@dezshira.com.
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