China

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In August 2018, China approved its greatest ever individual income tax (IIT) reform through Presidential Decree No. 9 of August 31, 2018, which came into force on January 1, 2019.

Although the changes to the law and its supporting regulations have had a major impact on IIT rules that apply to expatriates living and working in China, as certain incentives offered under the previous legislation have been extended, there has been no noticeable economic impact as yet.

However, as things stand, from January 1, 2022, incentives for expatriates will no longer apply, namely (i) exemptions for certain in-kind benefits such as rent, school fees or flights home; and (ii) the special annual bonus scheme.

Unless they are extended, these incentives will expire on December 31, 2021:

Exemptions on certain in-kind benefits

Until the end of the extension, certain in-kind benefits offered to expatriate workers in China are tax-exempt, so long as they are justifiable and reasonable. These include:

  • rent
  • meal and laundry expenses
  • business travel within and outside of China
  • two return tickets to country of origin or family home
  • reimbursement of moving costs to or from China at the beginning and end of their stay
  • Chinese language learning and school fees for their children in China

During the extension, these exemptions have been incompatible with the specific deductions introduced in 2019 as part of the tax reform.

Annual bonus

Until December 31, 2021, expatriates are able to choose, subject to certain requirements, whether to separate their annual bonus from all other income and calculate their tax on the bonus independently.

Given the progressive nature of IIT, this special rule has enabled expatriates to reduce their tax burden both on the bonus and on their regular income.

The impact of ending these incentives will depend on the specific circumstances of the expatriates and whether they can continue to enjoy the deductions introduced in 2019. However, broadly speaking, we expect that the measure will reduce expatriates’ overall net salary or raise the cost of expatriation for the employer in cases where expatriates have negotiated net salary conditions or tax equalization mechanisms.

In the coming weeks, we will be watching to see whether another extension is granted or any further action is taken to stem the rising cost of expatriation to China.

This post is also available in: Español

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