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To maintain and enhance the proactive fiscal policies, the State Council and various departments have announced their commitment to increasing macro-policy support by continuing and optimizing phased tax and incentives, including several individual income tax-related preferential policies. In this article, we will summarize these policies as follows:
• Renewal of the Implementation of the Preferential Policies on Individual Income Tax for Allowances and Subsidies for Expatriates and Other Related Individuals (MOFCOM STA Announcement [2023] No.29)
Foreigners working in China, especially non-China domiciled tax residents (those who do not have a domicile in China and live for 183 days or more in China in a given tax year) in China, can continue to enjoy tax exemptions on eight categories of fringe benefits, including housing rental, children’s education costs, language training costs, etc., for another four years, until December 31, 2027. These benefits are technically known as benefits-in-kind, or BIKs, which refer to additional perks not included in the salary and wages but paid on a reimbursement and non-cash basis. Such BIKs could be exempt from IIT (Individual Income Tax) provided that the expenses are reasonable in amount and supported by documents, such as invoices (fapiao), for each expense.
• Raising the standards for three special additional deductions for individual income tax
Starting from January 1, 2023, the standards for three special additional deductions related to childcare for infants and children under the age of 3, children's education, and support for the elderly will increase. Specifically, the special additional deduction for childcare for infants and children under the age of 3 will increase from the current RMB 1,000 to RMB 2,000 per child per month. The special additional deduction for children's education will rise from 1,000 yuan to 2,000 yuan per child per month. Similarly, the special additional deduction for supporting the elderly will increase from 2,000 yuan to 3,000 yuan per month.
• Continuation of the Annual (Lump-Sum) Bonus Individual Income Tax Policy
Resident individuals who receive an annual (Lump-Sum) bonus, following the guidelines outlined in 'State Administration of Taxation on the Adjustment of the Method of Calculating the Collection of Individual Income Tax for Individuals Who Have Received an annual Lump-Sum bonus' (State Taxation [2005] No. 9), will not have this bonus included in their yearly consolidated income. Instead, the income from the annual lump-sum bonus will be divided by the 12-month period and subjected to the consolidated income tax rate, which will be converted on a monthly basis to determine the applicable tax rate and calculate the tax. The applicable tax rate and deductions will be determined according to the monthly converted comprehensive income tax rate table, and the tax will be calculated separately. Residents also have the option to combine the annual (Lump-Sum) bonus with their comprehensive income for tax calculation. This policy will remain in effect until December 31, 2027.
• Continuing the Implementation of the Housing Exchange Support Policy Related to Individual Income Tax
Starting from January 1, 2024, and lasting until December 31, 2025, taxpayers who sell their current homes and repurchase new homes in the market within one year after the sale will receive a tax rebate for the individual income tax paid on the sale of their previous homes.
The introduction and extension of these preferential tax policies have provided immediate relief to some higher-earning foreign workers. Without extensions, some of them, particularly those who are burdened by the high cost of educating their children, may have experienced an increase in their personal tax liability.
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