Allowances and Bonus for Expat in China: What Will Change from January 2022

In June 2018 the Regulations for the Implementation of the Individual Income Tax Law of the PRC was passed by the Standing Committee of the People’s Congress and came into force in January 2019.

The aim was to ease the tax burden for lower-income earners and take a tougher stance on both foreign workers and high-income earners. 

The amendments include the widening of lower tax brackets, the definition of the Tax Residency Status, the increase of the standard monthly deduction from RMB 3,500 to RMB 5,000 for Chinese and the possibility for them to deduct some expenses from their own salaries.

For what concerns the allowances for foreigners, the Implementation introduced a three-year transition period which comes to an end in 2022.

On January 1st, 2022 certain major allowances for expatriates as the cost of rent, school fees and language expenses will become taxable for foreign employees, increasing the cost for companies.

Starting from next year, foreigners will not be able to claim previous allowances and will enjoy same deductions as domestic (Chinese) taxpayers capped at a very low level and it is clear that there will be significant impact on both foreign employees and companies in China. 

You can find here below the differences between the current and next year’s allowances:

Allowances

Until 31 December 2021

From 2022

Housing rent

Reasonable Amount

1,500 RMB/month or 18,000 RMB /year

Meals

-

Laundry

-

Children’s education

1,000 RMB/month/child

Continuing education expenses

400 RMB/month (for 48 months) or 3,600 RMB/year

Healthcare costs for serious illness

up to 80,000 RMB/year

Housing mortgage interest

1,000 RMB/month

Expense for supporting the elderly

up to 2,000 RMB/month

Below an example that takes into consideration a manager living in Shanghai that until end of December 2021 is entitled to deduct from his salary the payment of the rents (RMB 20,000/month), the school tuition for his only child (RMB 150,000/year) and meals. Due to the cancellation of some allowances, from 2022 he will deduct the expenses for supporting his parents, which are over 60 years old (RMB 2,000/month)

 

EXAMPLE (SHANGHAI)

2021

2022

Annual Gross Salary

                                    800,000

                                        800,000

Quick Deductions

                                      60,000

                                           60,000

Allowances

Rental

                                    240,000

                                           18,000

Meal

                                      60,000

                                                    -  

Child education

                                    150,000

                                           12,000

Elderly

                                                -  

                                           24,000

Taxable Salary

                              290,000.00

                                   686,000.00

IIT

                                      41,080

                                        154,180

The result is drastic in terms of salaries’ cut off that will drop drastically.

Individual taxpayer can choose to declare deductions by himself by visiting the relevant local tax office to make the registration or ask their employer to make preliminary deductions on a monthly basis and filing a standard Information Sheet of Special Additional Deductions for Individual Income Tax. 

Another important change that will affect both foreigners and Chinese is the calculation of year-end bonus.

Until the end of 2021, Individual Income Tax (IIT) on year-end bonuses is calculated and taxed separately from other taxable income, according to the following methods:

IIT = Taxable year-end bonus amount x Applicable tax rate of 1/12 of the year-end bonus – Quick deduction

In order to enjoy a preferential tax rate, bonus must be paid once a year and till now has resulted in an important fiscal benefit for employees which they were used to optimize their salaries though the year-end bonus. 

From January 1, 2022, the year-end bonus will be taxed as part of salary, following the same fiscal treatment and will be included in the annual comprehensive income’s calculation and declaration.

For what concerns bonus related to 2021’s performance we suggest companies to declare and pay them, where practicable, by the end of December in order to let employees enjoy the preferential tax treatment.

However, rumors are spreading about an extension of the current allowances’ regime and bonus to be granted by local tax authority to not negatively impact foreign investment in China from 2022 onwards.

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