Tax Newsflash

In late August, China’s Ministry of Finance (MOF) and State Taxation Administration (STA) published a series of circulars to extend multiple preferential individual income tax (IIT) policies (which would have expired on 31 December 2023) through 31 December 2027. On 31 August 2023, the State Council announced the increase of certain itemized deductions for resident individuals, which apply retroactively as from 1 January 2023. The above measures aim to reduce the tax burden for individuals and to retain foreign talents to work in China.

Preferential IIT policies extended through 31 December 2027

Separate taxing method for income from equity incentive plans of listed companies

A resident individual’s qualifying income from a listed company’s equity incentive plan (e.g., stock options, stock appreciation rights, restricted stock, etc.) may be taxed separately from the individual’s other comprehensive income (i.e., salaries and wages, remuneration for independent services, author’s remuneration, and income from royalties). Where the individual derives such income multiple times during a year, all such income must be combined for the purposes of using the separate taxing method. Individuals generally benefit from the separate taxing method since the applicable tax rate can be lower than the one that would have been applied if adding such income to other comprehensive income for IIT assessment.

It is worth noting that there are certain informational reporting obligations in relation to equity incentive plans being imposed on relevant employing entities. Failure to fulfil such obligations may lead to the denial of the application of the separate taxing method for employees.

Nontaxable benefits in kind for foreign employees

Foreign employees working in China may continuously enjoy certain nontaxable benefits in kind (BIK). Foreign employees that are resident in China may opt to claim either any applicable additional itemized deductions (e.g., children's education, housing rental) or any applicable nontaxable BIK (i.e., children’s education, housing rental, language training). Once an election is made, it may not be changed within the tax year.

The extension of this policy should be beneficial in retaining foreign employees in China beyond 2023. For companies that have not yet implemented the BIK policy or originally planned to phase out the policy for their foreign employees in China, they now can consider implementing such policy or continuing the existing BIK policy for another four years.

Preferential treatment for annual bonus

A resident individual may elect to have their qualifying annual bonus taxed separately from other comprehensive income. If the taxpayer makes this election, then the bonus amount must be divided by 12 to determine the applicable tax bracket/rate.

If a resident individual initially elects to have the bonus separately taxed from other comprehensive income, they may choose to revoke such election and include the bonus in comprehensive income for assessment purposes when they file their annual IIT return for the year in which the bonus was derived.

Taxpayers with high income generally prefer the separate taxing method since the applicable tax rate under the separate taxing method could be lower than the one that would have been applied if adding the bonus to other comprehensive income for IIT assessment. However, certain taxpayers may benefit from inclusion of their annual bonus in comprehensive income if they have unutilized deductions.

Waiver of annual filing and underpaid tax

If a resident individual derives comprehensive income on which advance IIT payments have been withheld and remitted properly by the relevant withholding agents, then such individual is exempt from the annual IIT filing requirement for comprehensive income, and any underpaid tax is waived accordingly, in the following situations:

• The individual's annual comprehensive income does not exceed RMB 120,000; or
• The amount of underpaid IIT for the annual comprehensive income does not exceed RMB 400.

This preferential policy has been introduced to reduce the compliance burden for some middle and low-income earners and their IIT expenditures. To be eligible for the waiver, taxpayers must ensure their advance IIT payments have been properly withheld and remitted by the relevant withholding agents.

Tax-free IIT subsidies for foreign talents working in the Guangdong-Hong Kong-Macau Greater Bay Area (GBA)

For qualifying foreign talents working in the nine mainland China cities of the GBA (i.e., Dongguan, Foshan, Guangzhou, Huizhou, Jiangmen, Shenzhen, Zhaoqing, Zhongshan, and Zhuhai), an annual tax-free subsidy will be granted so that the relevant individuals’ IIT burden does not exceed the amount of tax that would have been paid if they had worked in Hong Kong SAR.

The detailed rules (e.g., how to determine whether an individual is a qualifying talent, types of income eligible for the subsidy, the computation method of the subsidy, etc.) are decided by the local governments of the Guangdong Province and nine cities. According to the current rules, there are three types of income (i.e., comprehensive income, business income, and certain specified subsidies/awards) eligible for the tax-free IIT subsidies. The amount of the annual subsidy is computed as the relevant IIT already paid minus a “benchmarking tax” (which is computed as 15% of the relevant taxable income), with the subsidy being capped at RMB 5 million per year.

Increase of additional itemized deductions

As from 1 January 2023, each of the following three additional itemized deductions for resident individuals has been increased by RMB 1,000 per month:

For resident taxpayers who have already claimed the three additional itemized deductions when their withholding agents computed and remitted their advance IIT payments from January through August 2023, the overpaid IIT (due to the application of the increased deductions retroactively as from January 2023) will be automatically calculated by the tax authorities’ administration system and offset against the relevant IIT payable in the subsequent months during 2023. If there is remaining overpaid IIT after such offset, a final settlement will be allowed when the individual files their annual IIT return of comprehensive income.

Contacts：

Tax and Business Advisory
Global Employer Services
National Leader
Maria Liang
Partner
+86 21 6141 1059
mliang@deloitte.com.cn

Northern China
Huan Wang
Partner
+86 10 8520 7510
huawang@deloitte.com.cn

Eastern China
Irene Yu
Partner
+86 21 6141 1277
iryu@deloitte.com.cn

Southern China (Hong Kong)
Mona Mak
Partner
+852 2852 1051
monmak@deloitte.com.hk

Southern China (Mainland China)
Feifei Li
Partner
+86 755 3353 8160
ffli@deloitte.com.hk

Western China
Frank Tang
Partner
+86 23 8823 1208
ftang@deloitte.com.cn