Many expatriates have come to work and do business in China since its opening up to the world in the late 70s. As part of the country’s workforce, foreigners also pay all kinds of taxes such as VAT, IIT, or CIT, thus, contributing to the economic lifeblood of the country.
Have a look at our previous article on Tax Variation in China’s Monthly Income Tax
The Chinese government has set forth preferential treatments not only for foreign business owners but also for foreign working individuals. However, this trend will soon change as this favorable policy will only remain effective until the end of this year.
Non-taxable allowances of expatriates in China
Expatriates in China can avail of allowances that are exempt from their personal income taxes. It is a common practice of including non-monetary benefits in the compensation packages companies offer to foreigners. To ease the tax burden for expatriates working in China, the government decided to exempt their allowances from the computation of their IIT.
Look back on our previous article on Foreigners in China: How to Qualify for a Tax Exemption
Below is the list of non-taxable allowances in China intended for expatriates.
- Housing subsidies, food subsidies, relocation fees, and laundry expenses obtained by foreign individuals or employees in the form of non-cash or real-time sales
- Subsidies for reasonable domestic and foreign travel obtained by foreign individuals
- Family visitations, language training fees, and children’s education expenses obtained by foreign nationals provided they are approved as reasonable parts by the local tax authorities
- Dividends (including stock dividends and gains) earned by foreign nationals from foreign-invested enterprises
Key points to consider for expatriates allowance in China
China’s State Taxation Administration is yet to announce further updates on the preferential treatments on expatriates’ allowances. Hence, it is advisable for companies employing foreigners to exercise prudence in their accounting practices.
As per the latest announcements, foreign workers may not be able to enjoy tax exemptions on their allowances including housing rental, children’s education, and language training. However, the other allowance items may be treated depending on the future implementing guidelines.
Foreign tax residents in China would likely only claim itemized deductions also applicable to Chinese nationals. This will require them to present the fapiao for claiming deductions from their expenses. Under current regulations, foreign taxpayers cannot at the same time enjoy itemized deductions as well as the tax-exempt expatriate allowance.
Current itemized deductions
Assuming that the non-taxable expatriate allowances are discontinued, expatriates in China can then only avail of the current itemized deductions.
The following items summarize the itemized deductions available to Chinese nationals only:
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Children’s education expenses
For children three years old and above, each parent may claim half of the deduction each. Otherwise, only one parent may claim the full amount. This is applicable to pre-school education, primary school, middle school, high school, and higher educations. For each child, the itemized duction amount is RMB 1,000.
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Continuing education expenses
For a maximum period of 48 months, the parent may claim the deduction of RMB 400 per month instead of the undergraduate taxpayer. For those taking professional (masters) degrees, they can avail of deductions amounting to RMB 3,600 per year given that they present an official certificate.
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Medical expenses for critical illnesses
For medical expenses greater than RMB 15,000, employees can claim the actual amount of expense given that it doesn’t exceed RMB 80,000. Moreover, the taxpayer or their spouse (or the parents of minors) should file the deduction in the same year of occurrence.
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Interest expenses for mortgages
A couple (one of them) can fully claim RMB 1,000 per month for up to 240 months (20 years), given that they own the property jointly. If each of the spouses had already taken out the first mortgage before marriage, they may still each claim half of the RMB 1,000 each, or choose 100 percent for one of them. The interest expense for mortgages is applicable only to one (the first) property only.
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Housing rental expenses
The amount claims depend on whether the taxpayer lives in a major city, or a city with greater than or less than 1 million residents. A couple (one of them) can claim a full deduction of house rental expense if it is jointly made. If the spouses work in a different city and the couple does not own any house in either city, then they may both enjoy the full deduction applicable to them.
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- Major cities or municipalities directly under the Central Government, provincial capitals, etc. – RMB 1,500 per month
- A city with a population of more than 1 million – RMB 1,100 per month
- A city with a population of less than 1 million – RMB 800 per month
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Expenses on dependent elderly
Siblings split the allowable deduction of RMB 2,000 per month and the maximum claim per sibling is RMB 1,000 per month. This is applicable only if the taxpayer has parents over 60 years old or other legally dependent elderly.
Tax residency of expatriates working in China
Tax residency status in China mainly depends on a taxpayer’s length of stay. it also determines whether one is liable to pay taxes on worldwide income based on the new rules. The tax residency status of foreign workers is critical in evaluating their tax obligations or benefits.
Read more about the new rules here: Tax Residency Status in China and Related Rules
The tax residency status in China depends on being domiciled or non-domiciled. A domiciled individual is one who habitually resides in that country due to household registration, family ties, economic interests, or prolonged travels. A non-domiciled individual will pay personal income tax if he or she has lived in China for a cumulative period of 183 days or (6 months). In this case, the taxpayer’s China-sourced income will become taxable. However, if the taxpayer does not have a single departure from China within the tax year, the taxpayer may have to also pay tax for income derived overseas.
The starting point to determine the tax status of a foreign worker will be in accordance with the “six-year rule”. If a foreign worker resides in China for six consecutive (successive) years without leaving China, he or she will be subject to taxation on their income from anywhere in the world. Previously, the rule applied for only five years of stay. Now, it is extended to six years which means foreigners will have another year not to pay tax on their overseas income, given that they have a single departure for 30 days.
Conclusion
By closely monitoring the updates on tax, employers can easily plan for transitioning to new regulations. Although it is highly likely that the preferential tax treatments may be extended for further periods, prudence as an accounting principle should always be observed. That is, expect a good outcome but always prepare for the worst.
Contact us
S.J. Grand provides advisory and support on tax and accountancy services for foreign-invested companies in China including income tax filing and declaration for foreign employees. We also assist foreign companies with tax optimization strategies to take advantage of China’s various preferential policies. Contact us to get you started.
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