Extension of Preferential Individual Income Tax Policies on Benefits Granted to Foreigners and Annual Bonus of PRC Tax Residents

On August 18^th, 2023, the PRC Ministry of Finance and the State Administration of Taxation jointly released Announcement No. 29 ("Announcement 29") and Announcement No. 30 ("Announcement 30") to further extend the expiration date of preferential Individual Income Tax ("IIT") policies on certain benefits granted to foreigners and annual bonus of PRC tax residents from December 31^st, 2023 to December 31^st, 2027. The extension is good news for both foreigners working in China and all Chinese tax resident individuals.

Extension of the IIT exemption policies of certain benefits granted to foreigners

According to the circular Caishui [2018] No. 164 ("Circular 164"), the housing allowances, the language training allowances, and the children’s education allowances granted to foreigners were originally exempt from PRC IIT until December 31^st, 2021. Announcement [2021] No. 43 further extended the expiration date of the policy to December 31^st, 2023 and now the newly issued Announcement 29 extends the expiration date of this policy for additional 4 years to December 31^st, 2027.

Extension of the preferential IIT policies of annual bonus granted to PRC tax resident individuals

According to Circular 164, the annual bonus granted to PRC tax resident individuals could continuously be excluded from the annual salary incomes and taxed separately and such policy was originally valid until December 31^st, 2021. The “separate taxation” allows that the marginal IIT rate applicable to only 1/12 of the annual bonus amount can be used for calculation of IIT for the entire annual bonus. Announcement [2021] No. 42 extended the expiration date of this policy to December 31^st, 2023 and now the newly issued Announcement 30 further extends the expiration date of this policy for 4 years to December 31^st, 2027.

What actions should be taken by the enterprises?

In the short run, the uncertainty of IIT treatments of certain benefits granted to foreigners and annual bonus of PRC tax residents has gone.  

We have noticed that some enterprises have already amended the employment contracts with their employees (especially the expatriates) to reallocate the IIT cost bearing between the employer and the employee, based on the assumption that the underlying preferential IIT policies will be stopped from 2024 onwards. Considering that the expiration dates of the underlying preferential IIT policies are extended, the following applies:

• if an enterprise has not yet concluded an amended employment contract with the employees to factor in the potential change of the IIT policies, no further action is necessary now;

• if an enterprise has already concluded an amended employment contract with the employees to reallocate the IIT cost bearing, the enterprise may consider terminating the amendments and re-instate the original unamended employment contracts.

The extension of the preferential policies shows that China continues to be interested in providing a good investment surrounding for foreign investors. Further, China currently may not want to negatively influence domestic consumption by increasing IIT burden of tax residents. It is not clear yet whether the underlying preferential IIT policies will be further extended after 2027. In the long run, employers should still consider adjusting the remuneration structure to reduce the overall tax burden, if necessary, re-visit the company's overall compensation policy and make corresponding adjustments due to the potential changes of IIT policies, especially when concluding employment contracts with foreign employees for a term longer than 4 years.  

This topic will be re-visited in 2027.