Global Employer Services News May 2021

Main PRC Individual Income Tax preferential treatment and updated trend

With the PRC Individual Income Tax (“IIT”) reform since 1 January 2019. The Ministry of Finance and State Administration of Taxation announced relevant preferential treatment policies during the transition period from 1 January 2019 to 31 December 2021 (“Circular 164”) on 27 December 2018.

Main PRC IIT Preferential Treatment        

Annual bonus

Individuals could choose to either add the annual bonus to their regular wage and salary income or treat it as a separate income for PRC IIT calculation purpose. Annual bonuses can enjoy a lower tax rate by applying for the latter treatment.

Equity based incentive income

Similar to the annual bonus, equity based incentive income granted by the employer which is a listed company in China or overseas, while relevant tax registration has been completed and approved by the local tax authority, could separate from regular wage and salary income to calculate PRC IIT.

Severance payment

Under current PRC IIT regulations, for one-off compensation payment received by an individual due to termination of employment relationship with the employer, only the portion in excess of 3 times of the city’s average salary of the previous year where the employer is located is taxable in China. Also, it is not required to added into the individual’s regular wage and salary income.

Benefit-in-kind Allowances (“BIK”) entitled to foreign individuals

Qualified foreign individuals who receive the following allowances from employers could be treated as non-taxable income and exempted from PRC IIT:

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

Updated Trend

Annual bonus

If the current preferential treatment will be suspended after the transition period, annual bonus payment will need to be combined with the individuals’ regular wage and salary income for PRC IIT purpose which will increase their tax burden.

Equity based incentive income

Equity based incentive income will no longer be allowed to be treated as a separate income and should be added into the individuals’ regular wage and salary payment to calculate PRC IIT. Also, the IIT liability on such payment will be higher than adopting the current treatment.

Severance payment

Similarly, severance payment will need to be taxed together with the individuals’ regular wage and salary income while the preferential treatment might be expired.

Benefit-in-kind Allowances (“BIK”) entitled to foreign individuals

Instead of exempting from PRC IIT on the full amount of qualified BIK allowances, foreign individuals who reside in China for one full year could only enjoy the following itemized deductions if applicable:

  • Housing loan interest or housing rental expenses
  • Children education expenses
  • Continued education expenses
  • Medical expenses for serious illness
  • Alimony for elder parents

Each itemized deduction has an exemption cap and therefore the full amount of the incurred expense is not deductible as non-taxable income. In this regard, it will significantly increase individuals’ tax amounts.

BDO comments

Currently, it is not certain that the aforesaid preferential tax treatment could be still valid. However, we can foresee that the China tax government will release relevant tax policies within this year, and it is likely that these policies will be extended for another period.

In view of the above, we would suggest employers/individuals to pay attention to the followings:

  • Closely follow up on the tax policies updates and make sure to be compliant with the updated tax implementation accordingly;
  • Perform remuneration cost estimation based on the updated tax policies and seek potential tax planning opportunities in advance so as to enjoy more benefits from PRC IIT perspective;
  • Internal review and update company’s policies such as C&B, Talent Incentive, Secondment Arrangement and so on timely;
  • Communicate with employees on the impacts in relation to the tax policies updates appropriately.  

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              

Rebecca Chen