Several changes to the individual income tax (IIT) for foreign residents in China will take effect on January 1, 2022.
The most significant change that will impact the expat community regards the ending of IIT exemption for ‘fringe benefits’ on December 31, 2023. Confused? Us too. But let’s try and break it down. Think of this as your ‘2022 Tax Laws for Dummies.’
What are fringe benefits?
Fringe benefits are divided into eight categories: housing expenses, school fees for children, language training, meals, laundry, relocation expenses, business travel and home leave. Previously, foreigners living in China and holding a working visa could enjoy a reduction in their IIT for fees going towards anything in these eight categories.
If you’re a foreigner working in China, you may have noticed that your salary is broken down into different sections, for example, housing fees or flight allowances. Some companies even allow foreign staff to submit a fapiao (a tax receipt) for meals, laundry, school fees and anything else listed in the eight categories above. This is all done to keep your IIT as low as possible.
Before January 1, 2022, both foreigners and Chinese nationals living in China could deduct expenses of up to 30% from their gross salaries. Under the previous laws, from January 1, 2022, foreigners would no longer be able deduct expenses from their IIT.
If you were enjoying these deductions, unless your company make changes to your salary (for example, agreeing to paying you a fixed sum after tax) you would have to pay more tax. If you didn’t submit tax receipts or your company wasn’t helping you submit tax receipts, you probably won’t see much of a change.
If the IIT tax laws weren't extended (which they ultimately were on December 31, 2021 just after 8pm), under the new changes both employers and/or foreign employees would then face an increase in tax burdens or labor costs.
Let's do a little role play: Steve is the last foreigner left in Guangzhou in 2021, and therefore an international school offers him RMB1,000,000 per year to teach. He pays RMB200,000 in rent (because, why not) and RMB100,000 in school fees. The RMB300,000 he pays in school fees and rent (and anything on top of that he can submit for meals, laundry, etc.) is untaxed. Wohoo! Steve’s taxable income is at most RMB700,000 and he is therefore in the 30% tax bracket. He pays RMB130,000 in tax in 2021.
In 2023 when rent, school fees and everything else are no longer tax exempt, Steve’s taxable income goes from at most RMB700,000 to a little under RMB1,000,000 per year. He therefore moves up to the 35% tax bracket and pays RMB240,000 in tax. He gambles to win the money back, gets addicted, and loses it all. China finds out he’s been engaging in illegal gambling, and they take his assets and deport him. Tough life.
From January 1, 2024, tax residents in China who obtain an annual one-time bonus will have to combine with their yearly income and therefore pay IIT on said bonus. In short, annual bonuses will be classified as comprehensive income and therefore will be taxed.
[Cover image via Flickr]
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