China’s IIT Special Additional Deductions: An Explainer

UPDATE (August 31, 2023): On August 31, 2023, the State Council released the Notice on Raising the Standard of Special Additional Deduction for Individual Income Tax, raising the deduction standards on nursing expenses for children under 3 years old and children’s education from RMB 1,000 per month to RMB 2,000 per month, respectively, and raising the deduction standard on expenses for supporting the elderly from RMB 2,000 per month to RMB 3,000 per month. The adjustments took effect on January 1, 2023, retrospectively. 

UPDATE (March 28, 2022): On March 28, 2022, the State Council released the Notice on the Establishment of Individual Income Tax Special Additional Deduction for Infants Nursing under 3 Years Old, which stipulates that the nursing expenses for children under three years old will be deducted from IIT taxable income as special additional deductions, effective from January 1, 2022. The deduction standard is RMB 1,000 per month for each child. Meanwhile, the State Taxation Administration (STA) revised the Operational Measures for Special Additional Deductions for Individual Income Tax (for Trial Implementation).

On December 21, 2018, China’s State Taxation Administration announced the “Operational Measures for Special Additional Deductions for Individual Income Tax (for Trial Implementation) ” (or “Trial Measures”). The Trial Operational Measures, which took effect on January 1, 2019, marks the first phase in a gradual reform of special additional deductions under China’s new IIT Law.

On March 28, 2022, the State Council released the Notice on the Establishment of Individual Income Tax Special Additional Deduction for Infants Nursing under 3 Years Old, which stipulates that the nursing expenses for children under three years old will be deducted from IIT taxable income as special additional deductions, effective from January 1, 2022. The deduction standard is RMB 1,000 per month for each child. Meanwhile, the STA amended the Trial Measures to accommodate the updates.

China’s IIT Special Additional Deduction

According to the Trial Measures and the newly released Notice, there are seven categories of special additional deductions that can be deducted from IIT taxable income:

• Nursing expenses for Children under 3 years old (newly added);
• Children’s education;
• Continuing education expenses;
• Healthcare costs for serious illness;
• Housing mortgage interest;
• Expenses for supporting the elderly; and
• Housing rent.

The applicable scope, deduction amount, and deduction method of each special additional deduction item are summarized below:

Notably, under the Trial Measures, the deductible for healthcare costs for serious illness can be availed by the taxpayer and their spouse or children. This new measure will provide more benefits to families.

For nursing expenses for children under 3 years old, the STA clarifies that parents (guardians) of toddlers under 3 years old are eligible for the deduction regardless of whether they are born in China or abroad.  Taxpayers can enjoy the deduction from the month the baby is born until the month before the baby turns 3 years old.

Expatriates affected

The special deductions are available for both domestic and expatriate employees. In the past, all foreign employees were entitled to apply some tax-exempt allowances or fringe benefits (housing, laundry, home visit, education, etc.).

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According to the latest regulation, expatriates can choose to avail of tax-exempted fringe benefits or special additional deductions before the end of 2023. However, once decided, the method cannot be changed during one calendar year.

Starting from January 1, 2024, expatriates can only enjoy special additional deductions when paying IIT in China, unless future regulations say otherwise.

How to claim special additional deductions

The Trial Measures stipulate that taxpayers who want to claim special additional deductions have to provide their personal information and keep the relevant documents as evidence for five years. In other words, taxpayers need to register via an IIT application (which requires face recognition) or physically go to the local tax bureau to complete personal registration.

However, we note that foreign taxpayers may need to physically visit the tax bureau and get the registration done in person.

Once the taxpayer has their personal account activated by the bureau, they may claim the special additional deductions through their employer or their annual tax filing (March 1 to June 30 every year).

In regards to the latter, the Trial Measures stipulated that the special additional deduction can be managed by the individual via annual tax clearance if the taxpayer does not want to share personal information with their employer. Accordingly, taxpayers can choose not to disclose personal information to a third party (such as an employer); this may help taxpayers protect their privacy, providing a degree of flexibility.

Due to the COVID-19 pandemic and other economic headwinds, Chinese authorities are tightening tax compliance management while providing more incentives to struggling businesses. Given this, taxpayers and their employers should study the relevant laws and consult with their trusted local advisers to learn more about claiming special additional deductions under the Trial Measures.

(This article was first published on January 7, 2017, and was last updated on August 31, 2023.)

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