Extension of tax preferential policy for annual performance-related bonuses and tax exemptions for expatriates' allowances in China

published on 29 August 2023 | reading time approx. 1 minute

Along with the reduction of negative impact from Covid-19, the Chinese government has embarked on a variety of supportive policies to help the economy recover. On 28 August 2023, the Ministry of Finance (MOF) and the State Administration of Taxation (SAT) announced that the tax exemption treatment for expatriates on certain allow­ances, which was announced to expire on 31 December 2023, is extended to 31 De­cem­ber 2027 instead.

As known, for many years, expatriates living and working in China have been entitled to tax exemption treat­ment on housing allowances and tuition for their children in international schools. With the implementation of the New Individual Income Tax (IIT) Law in 2019, SAT has set and clarified the special additional deduction items for IIT aiming to gradually unify the deduction items for Chinese taxpayers and expatriates. Many expat­riates expressed their concerns in terms of a significant increase of their IIT burden from year 2024 onwards. The extension of this policy is definitely great news, significantly boosting the confidence of foreign investors in China and relieve the potential tax burden that expatriates may face in the future, ensuring stability of expatri­ates' tax liability for the future four years to come.
 
We recommend that expatriates shall review their current employment contracts and communicate with the employer or its head office on the extension of the exemption policy. It is worth to note that this exemption only applies to allowances explicitly stated in the contract and invoiced in accordance with tax regulations. Further­more, the expatriates who choose the exemption will not be able to benefit from the special additional deduction items for IIT as most Chinese citizens additionally.
 
At the same time, China's tax bureau has also announced that the tax preferential policy for one-time annual performance-related bonuses will be extended until 31 December 2027 as well, to be taxed separately without being included in the year's comprehensive income. This also aims to reduce the tax burden on all resident taxpayers and provide a positive tax environment to boost economic development in China.