China extends tax breaks regime for foreign workers

China extends tax breaks regime for foreign workers

The Chinese government has postponed the scrapping of some of the tax benefits enjoyed by foreign workers for two years.

Expatriates working in China were set to lose some of their benefits in kind (BIK) from 31 December 2021, but the move has been put back by 24 months.

Foreign nationals would have lost these so-called ‘fringe benefits’ including the reimbursement of housing rental costs, children’s education costs and language training costs, resulting in a larger tax liability for higher earning workers.

Due to the implementation of the Amended PRC Individual Income Tax (IIT) Law and relevant regulations passed in January 2019, certain non-taxable BIK were to be scrapped.

This proposed policy change sparked concern among foreign individuals as well as their employers, who may face an increase of tax burdens or employee costs. However, the measures will not now come into effect until January 2024 at the earliest.

 

What are the tax-exempt benefits?

Non-Chinese domiciled individuals working in China can still enjoy tax-exempt benefits-in-kind, including:

  • Housing expenses.
  • Education expense for children.
  • Language training expenses.
  • Meal fees.
  • Laundry fees.
  • Relocation expenses.
  • Business travel expenses.
  • Home leave expenses.

Such benefits-in-kind could be exempt from tax provided that the expenses are reasonable in amount and there are corresponding supporting documents. In addition, there are some specific requirements for each category. For example, for home leave expenses, only the travel expenses for the expatriate from China to their/spouse’s home country for up to two trips per year could be exempt from tax.

Non-Chinese domiciled tax residents (who do not have a home in China and live for 183 days or more in China in a given tax year) can choose to enjoy:

  • The tax-exempt benefits-in-kind; or
  • The six additional itemized deductions.

The six additional itemized deductions include:

  • Children’s education expenses
  • Continuing education expenses
  • Housing mortgage interest
  • Housing rent
  • Healthcare costs for serious illness
  • Expenses for taking care of the elderly

The two policies cannot be simultaneously enjoyed by non-China domiciled tax residents. And once decided, non-China domiciled tax residents cannot change their preference within a given tax year.

David Niu, Senior Manager in the Human Resources Administration and Payroll Services team at Dezan Shira & Associates’ Beijing office, said: “Given the possibility that the government may abolish the tax exemptions on all of the eight benefits-in-kind, or the tax bureau may become more rigorous in approving the tax exemptions on the remaining items, employers should prepare for possible changes as early as possible to avoid concerns from expatriates.”