Extension of PRC Individual Income Tax (“IIT”) preferential treatment on annual bonus, benefit-in-kind allowances and equity incentive income

In order to release taxpayers’ PRC Individual Income Tax (“IIT”) burden, the Ministry of Finance and the State Administration of Taxation issued Circular [2021] No. 42 and No. 43 on 31 December 2021 on the extension of preferential tax treatment on annual bonus, benefit-in-kind allowances and equity incentive income. Such treatments on annual bonus and benefit-in-kind allowances will be valid till 31 December 2023 whilst equity incentive income will expire on 1 January 2023.

Annual bonus income

Under current PRC IIT law and regulations, individuals who receive an annual bonus income could be assessed on a separate basis outside of their monthly income. However, individuals can select the more beneficial treatment based on their actual situation.

For calculation purpose, the calculation formula is different for China tax resident and non-China tax resident individuals. Detailed formula is listed as below:

China tax resident individuals

IIT payable on annual bonus = Total annual bonus * Tax rate – Quick deduction

* Monthly tax rate table should be applied.

Non-China tax resident individuals

IIT payable on annual bonus = [(Total annual bonus / 6) * Tax rate – Quick deduction] * 6

* Applicable monthly tax rate and quick deduction is determined by the total annual bonus amount which divided by 6.

Benefit-in-kind allowances

Same as an annual bonus, the prepferential tax treatment on the following benefit-in-kind allowances entitled to foreign individuals working in China will also be adopted till 31 December 2023.

Housing rental expenses
Children education expenses
Home leave airfare expenses
Language training expenses
Meal and laundry expenses
Relocation expenses

Equity incentive income

From 31 December 2022, individuals who participate in qualified equity incentive plans implemented by foreign and China listed company could enjoy tax benefit treatment on such income in China. Equity incentive income could be treated as a separate income without combining with an individual’s regular monthly employment income for IIT calculation purpose. The calculation formula for both China tax reisdent and non-China tax resident is indicated as below:

China tax resident individuals

IIT payable on equity incentive income = Total taxable equity incentive income * Tax rate – Quick deduction

* Annual tax rate table should be applied.

Non-China tax resident individuals

IIT payable on equity incentive income = [(Total taxable equity incentive income / 6) * Tax rate – Quick deduction] * 6

* Applicable monthly tax rate and quick deduction is determined by the total annual bonus amount which divided by 6.

In addition, China national tax government issued an announcement in October 2021 mentioning that the implementation of tax registration for equity incentive plan will take immediate effect. For the tax registration for Year 2021, it should be completed by the end of this year. Whilst starting from Year 2022, the initial tax registration will need to be performed as soon as the implementation of the equity incentive plan and the supplementary registration for new grant/vest is required to complete within 15 days of the following month. Otherwise, the local tax authority has the right to impose penalty and degrade the company’s tax credit. This will affect the company’s reputation which is irrecoverable.

Our recommendations

Companies/withholding agents should closely follow up with the updated policies on the PRC IIT reform and take relevant implementation accordingly;

Companies/withholding agents need to pay more attention to their internal system and processes. If necessary, it is recommended to involve professional agent to assist them on the reporting and tax filing issues in order to avoid potential non-compliance risks;

We suggest that foreign individuals have a tax planning in advance with respect to their PRC IIT taxation and engage a professional agent to design a compensation structure and employment/assignment type so as to fully utilize tax benefits from PRC IIT perspective.

BDO China International Tax Service team is experienced in handling the relevant IIT matters and providing professional IIT advisory for both foreign and Chinese individuals. We will follow up the rapid changes in China regulatory environment, keep you posted and share our primary source to you accordingly.

For further information in relation to above topic, please do not hesitate to contact us.

Gordon Gao
gordon.g@bdo.com.cn

Rebecca Chen
rebecca.chen@bdo.com.cn