Overview of Certain Tax Policies Changes in 2022

As year-end is approaching, some possible changes on the preferential tax treatments in 2022 come to our attention. By the expiration or updates of some treatments, enterprises in China may face the substantial impact from Individual Income Tax (“IIT”), Corporate Income Tax (“CIT”), and Value Added Tax (“VAT”). As an overview, we summarize the essential changes for your reference.

End of Transitional Period for Certain IIT Policies

As announced by the Chinese State Administration of Taxation (“SAT”) in 2018, certain IIT policies will be abolished after a transitional period of three years from 2019 to 2021 and be no longer valid since 2022. Such policies to be abolished include:

(a) The preferential IIT treatment on the one-time performance-related annual bonus;

(b) The IIT exemption treatment on housing, children’s education and language training allowances granted to foreign employees in China;

(c) The preferential IIT treatment on equity-based incentives granted by listed companies.

Policy (a) would have big influence all over China as it concerns all resident-taxpayers including Chinese and foreign employees. Without the special treatment on the annual bonus, the overall IIT burden on wages and salary income might be even higher than before the IIT law revolution in 2019.

Abolishment of policy b) is obviously a big concern of foreign employees working in China as many employers provide allowances for such living costs as the pre-condition of hiring foreign employees. Please note that after the abolishment, even if these allowances are handled by the employer directly as a company expense, IIT obligation still exist for those employees.

For Policy (c) it is not stipulated to be entirely abolished but subject to further update in 2022. Therefore the current tax preferential policy is assumed to be carried forward until further notice.

Possible Changes of Preferential CIT to Support Small and Micro Enterprises

According to the preferential tax treatment prevailing in 2021, small and micro enterprises can enjoy reduced CIT when certain conditions are met, with effectiveness from 1 January 2021 as follows:

The part of annual CIT taxable income under RMB 1 Mio. is subject to a reduced CIT rate of 2.5 percent from 1 January 1 2021 to 31 December 31 2022;
The part of annual CIT taxable income of more than RMB 1 Mio. but less than RMB 3 Mio. is subject to a reduced CIT rate of 10 percent from 1 January 2021 to 31 December 2021.

Up to now there is no official announcement to extend the CIT rate of 10 percent for the taxable income between RMB 1-3 Mio. after 31 December 2021.

Possible Changes of Preferential VAT to support Small scale VAT taxpayers

Small scale VAT taxpayers can enjoy reduced VAT when certain conditions are met, with effectiveness from 1 April 2021 as follows:

Small scale VAT Taxpayers with monthly taxable income below RMB 150T, are subject to VAT exemption till 31 December 2022;
Small scale VAT taxpayers are subject to a reduced VAT rate of 1 percent (instead of 3 percent) as unified all over China, till 31 December 2021.

Up to now there is no official announcement to extend the VAT rate of 1 percent for small scale VAT taxpayers after 31 December 2021.

It is understood that such temporary tax reliefs for supporting small enterprises navigating the COVID pandemic may end when the economy in China is slowly back to normal level.

With regard to the substantial IIT burden on salary income in particular with impact on foreign employees working in China, up to now there is no update from the Chinese tax authority. We will keep eyes open to see whether there might be any news or guidelines released in the last month of 2021.

We suggest the taxpayers to get prepared for the possible changes from 2022 on and make the business plan and forecast accordingly.