China: Tax honeymoon for expatriates ending on 31 December 2021

1 January 2022 will be the date when the three major allowances (housing rental, child education and language training) for expatriates working in China will cease to be exempt from China’s individual income tax (IIT) – instead they will be replaced by six other deductions which are unfortunately capped at a very low level. This will result in a drastic cut to take-home pays (see two examples below).

On the same date, the IIT benefit for annual bonus is also set to end for all tax residents including expatriate staff in China.

Rumour has it that an extension could be granted by the Chinese tax authority. No matter what the decision is, both employers and employees are advised to prepare for the worst.

We have responded to the FAQs below in order to shed light on some major considerations in China tax regimes – for both employers and employees.

FAQs on IIT policy change

Q: To what extent will the tax burden increase after 2022?

A: We are talking about a 10% ~ 30% salary cut. The higher the allowances, the larger the cut – when the IIT exemption is cancelled (as announced already). Otherwise, we can keep our fingers crossed that an exceptional extension will be offered. Alternatively, employers must see if any alternative way of tax calculation can offer better savings. For example, for those who earn a living by obtaining a large bonus or sales commission, they can consider combining the bonus with all their other income for the IIT calculation, instead of taxing the bonus alone. It may achieve an overall tax saving.

Q: How should employers cope with the policy changes?

A: Employers need to revisit the employment contracts, adding proper 2021-2022 transition clauses, e.g. how a salary (take-home pay) should be adjusted, or how much of the tax cost should be borne by the employer. Most of the current employment contracts have not addressed how to deal with the salary cut following the policy changes.

Q: Does it matter to staff stability?

A: Very much. Some expatriates may find it hard to accept or continue an assignment in China if their take-home pay will drop drastically. They would expect employers to tackle the issue as a priority. This shows how much an employer cares about its workforce. No matter what, a solution must be sought on a case-by-case basis. It will also take time to seek professional help where contracts are concerned.

Q: Will the IIT benefits be renewed beyond 2022?

A: It was announced that the IIT exemption for rental, child education and language training will fail to exist by the end of 2021. It has not mentioned any other allowances (e.g. home leave, relocation expense, meal, laundry) – which may continue to be tax free.

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