China: IIT benefits continue for another year

The Chinese tax authority confirmed to the public, at short notice at the beginning of the new year, that the following decade-long preferential individual income tax (IIT) treatments, which should have ended on 31 December 2022, will continue for another year.

1. IIT benefits for stock-based rewards for employees

• Under a special IIT filing policy, stock-based rewards are taxed separately from the consolidated income for IIT filing purposes, resulting in a lower IIT rate and burden. This policy has been renewed twice, from 2019 to 2022.
• It was just announced that the stated preferential policy on stock rewards will contin­ue for another year, until the end of 2023. Following the same treatment as before, stock-based rewards can be taxed independently from the consolidated income.

2. IIT benefits for the special programmes between the mainland and Hong Kong (HK)

• Capital gains from the disposal of HK-listed stocks by individual investors in the Mainland under the Shanghai-HK Stock Connect or the Shenzhen-HK Stock Connect programmes, and the capital gains from the trading of HK fund units under the mutual recognition programme will still be IIT-exempt through 31 December 2023.

3. New IIT treatments on bonuses and perks at work

• Under the current policy, a bonus can be filed for IIT separately from the consoli­dated income, so as to enjoy a lower IIT rate and IIT burden. However, the policy is supposed to expire by the end of 2023.
• Thus, starting from 2024, if no further renewal is granted for the policy, all bonuses will be taxed together with wages on a consolidated basis, and will therefore be subject to a higher IIT rate.
• Moreover, the current IIT exemption treatment for expatriates’ perks (i.e. rental, child education and meal allowances) is supposed to expire by the end of 2023.

The concern that the expatriates’ IIT burden might surge after 2023 may revive again. Expatriate employees in China, uncertain if the policy would be granted another period of renewal, would be put on edge again. If a renewal does not take place, the mentioned perks would be taxed for IIT at a rate much higher than that under the current policy, even though some minor deductions are still allowed.

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