Payroll and income tax exemptions on allowances and benefits for foreign employees are now extended again for an additional four years - until the end of 2027
Competition for international talent, individual income tax (IIT) incentives for foreign employees working in China extended by the end of 2027
The Ministry of Finance and the Tax Authority of the PRC last issued a guideline in December 2021 to extend the implementation period of preferential tax exemptions for allowances and benefits such as apartment rent, language course fees and school fees for children for foreign employees, which was issued at the end of 2018, to December 31, 2023. Now, a new guideline to extend the period of preferential tax exemption for payroll and income tax of the above allowances and benefits to December 31, 2027, has been issued on August 28, 2023.
This extension will reduce the payroll and income tax burden of some higher-income foreign employees working in China, especially those who receive high allowances such as apartment rent, fees for language courses and school fees for children.
The following is a general description of the "eight allowances and benefits" for exemption from payroll and income tax for foreign employees working in China, as shown in the table below. These “eight allowances and benefits” can only be claimed by foreign employees (e.g., nationality: German), regardless of whether they are resident or non-resident taxpayers. Resident taxpayers (nationality: Chinese) are not entitled to this scheme.
"Eight allowances and benefits" for exemption from payroll and income tax for foreign employees working in China
|Eight allowances and benefits||Remarks|
The amount of allowance received by the foreign employee in the form of non-cash or reimbursement should be reasonable.
The terms "non-cash" and "reimbursement" refer to the reimbursement of the above expenses to the foreign employee by the enterprise based on the relevant contracts, invoices and fapiao (VAT invoice), or the payment of expenses by the enterprise directly to a third party on behalf of the foreign employee, e.g. the payment of rent by the enterprise directly to the landlord on behalf of the foreign employee.
The company should provide the local tax authorities with valid documentation of allowance reimbursement, such as contract, invoice and fapiao (VAT invoice). The tax exemption shall be confirmed by the approval of the relevant tax authority.
Relocation allowances are expenses reimbursed to the foreign employee due to his secondment to China or departure from China.
Foreign workers should submit valid receipts such as invoices and fapiao (VAT invoices), etc., which then can be verified and approved by relevant tax authorities as reasonable and partially tax-exempt.
|Foreign employees should submit travel reimbursement forms with supporting documents for reimbursement of transportation and accommodation expenses such as invoices and fapiao (VAT invoice), etc., which can then be verified and approved by the relevant tax authorities, and the reasonable part will be exempt from tax.|
Foreign employees should submit relevant receipts for family visits, such as airline tickets, transportation costs, etc., which can then be verified and approved by the relevant tax authorities.
Tax exemption is granted for the part used for the foreign employee's own family visits if the number of visits and the amount of remuneration are reasonable.
|Foreign employees should submit receipts for expenses for language courses in China, such as for learning Chinese, and for their children's school fees in China, such as international kindergartens or international schools, etc., which can then be verified and approved by the relevant tax authorities, and will be exempt from tax provided they are within reasonable limits.|
In practice, enterprises and foreign employees should pay attention to the following:
- If a company pays its foreign employees monthly or regularly allowances and benefits in the name of the above "eight allowances and benefits", it should be shown in the payroll, and since they are considered as salary income, they are subject to payroll tax in China.
- The company is advised to declare the allowances and benefits in kind for foreign employees to the local tax authorities in advance and keep the relevant receipts and proofs for the reimbursement of the allowances and benefits in kind to their foreign employee. In the event of a tax audit, the company can then submit the documents to the tax authorities confirming that the use of the benefits complies with and meets the conditions.
- Companies should ensure that the reimbursement items correspond to the actual needs of the company and that the reimbursement expenses and allowances are reasonable. If the company fails to provide valid receipts and supporting documents, the company should expect that such expenses will be non-deductible expenses in corporate income tax (CIT), the relevant tax authorities will have the right to grant the company a tax adjustment, and the company will be subject to back taxes and penalty.
bdp's Chinese and German tax and legal teams provide one-stop services to German dispatching companies and expatriates, including salary design for the secondment, payroll tax and social security planning, and application for work permits and residence permits in China.
If your company is sending employees to China or you would like to work in China as an expatriate, please feel free to contact firstname.lastname@example.org for any questions regarding personnel, residence, labor, tax and social security laws related to the secondment. Our bdp China Desk Team will be happy to advise and assist you.
By: Ricky Ma (Head of Tax Team), Fang Fang (Partner at bdp China)
Translation: Fang Fang (Partner at bdp China), Sara Zimmermann (Senior Consultant)