According to the Individual Income Tax Law of the PRC, which came into force on January 1st 2019, some provisions related to the three-year transition period will no longer be valid starting from January 1st 2022. Such provisions include the computation methods of individual income tax (IIT) on annual bonuses for all employees and tax-exemption allowances for foreign employees. In other words, the new Individual Income Tax Law may directly impact the net incomes of local citizens and foreign employees working in China.
IIT on annual bonuses will be calculated in a different way
Before the new provisions apply on January 1st 2022, there are two ways of calculating IIT on gross one-time bonuses:
- Combining the one-time annual bonuses with a comprehensive yearly income
- Considering the one-time annual bonuses as an independent source of income
According to the Circular on Issues concerning the Connection of Relevant Preferential Policies after the Revision of the Law on Individual Income Tax (No. 164 [2018]) announced by the Ministry of Finance and the State Administration of Taxation, the one-time annual bonus that a resident obtains before December 31st, 2021 that confirms with the rules in the Circular of the State Administration of Taxation on Adjusting the Method of Calculating and Levying Individual Income Taxes on Annual One-off Bonuses, etc. Obtained by Individuals (No. 9 [2005]) will not be included in their comprehensive yearly income for taxation. It could still be considered as a separate source of income.
The tax rate is calculated by dividing the one-time annual bonus into 12 months and using the relevant applicable tax rate, then a quick deduction related to the corresponding range defined by the Circular.
The calculation formula is as below:
Tax payable = one-time annual bonus × applicable tax rate - quick deduction
Another option for residents who obtain a one-time year-end bonus can also combine it with their comprehensive yearly income for tax calculation.
Starting from January 1st, 2022, the one-time year-end bonus obtained by a resident shall be combined into their comprehensive yearly income and then be taxed accordingly.
At the beginning of 2021, we published an article "How to Calculate IIT on End-of-Year Bonuses in China" explaining the differences between using these two computation methods to calculate IIT on one-time annual bonuses. The article provided an example of how the difference in earnings by one yuan could lead to payable tax gaps. With the implementation of new provisions, companies and HR staff do not need to be concerned about tax planning on year-end bonuses.
If an employee has already received their 2020 year-end bonus in early 2021 and calculated the IIT by treating the annual bonus as an independent source of income and was taxed under that particular method. This would mean that their 2021’s year-end bonuses would now have to be combined into comprehensive yearly income under the new Individual Income Tax Law.
Tax-exemption allowances for foreigners are different from the past
Another significant change is that starting from January 1st, 2022, foreign employees will no longer enjoy the preferential policy of tax exemptions, including housing rent, language training fees, and children’s education fees. Foreign employees who are identified as PRC resident taxpayers* will have the same access to the six IIT special additional deductions granted to the Chinese employees. Learn more about annual IIT reconciliation filing.
*A PRC resident taxpayer means a China resident taxpayer as either an individual domiciled in Mainland China or a non-domiciled individual who stays in Mainland China for 183 days or more in a calendar year.
| IIT Special Additional Deductions | ||
| Item | Applicable scope | Deduction amount |
| Children's education fees | Preschool education | RMB 1,000 per month for each child |
| Diploma education | ||
| Continuing education expenses | Diploma education | RMB 400 per month, up to 48 months |
| Professional qualification | RMB 3,600 in the year when the related certificate is issued | |
| Healthcare costs for serious illness | Taxpayer's individual payment for medical expenses that are within the scope of the medical insurance directory | Medical expenses above RMB 15,000 and not exceeding RMB 80,000 can be deducted when processing the annual IIT filing |
|
Housing mortgage (Taxpayer cannot enjoy both housing mortgage deduction and housing rent deduction at the same time) |
First residential property purchased by the taxpayer or their spouse | RMB 1,000 per month for no more than 240 months |
| Expenses for elderly care | Taxpayer needs to support parents aged over 60 or other legal dependents | RMB 2,000 per month |
|
Housing rent (Taxpayer cannot enjoy both housing mortgage deduction and housing rent deduction at the same time) |
Taxpayer and spouse do not have residential property in the city where they work |
There are three applicable deduction amounts according to different city sizes:
|
*Note: The table above only summarises the deduction amount applicable to general situations. Please refer to the policies of State Taxation Administration on deduction methods. Should you have any enquiry, please don’t hesitate to consult Hawksford’s HR and Payroll Services team for advice.
For example, a foreign employee Mr. A working in Shanghai has a monthly income of 30,000 RMB. He pays 8,000 RMB rent every month, 5,000 RMB for his children’s tuition at international schools, and 1,000 RMB for learning Chinese.
The amount of Mr. A’s taxable income in 2021 is:
30,000 - 5,000 (quick deduction) - 8,000 (housing rent) - 5,000 (children’s education fees) - 1,000 (language training fees) = 11,000 RMB
According to the latest IIT policies which will be valid in 2022, the amount of Mr. A’s taxable income will become:
30,000 - 5,000 (quick deduction) - 1,500 (housing rent for tier-one cities) - 1,000 (children’s education fees) = 22,500 RMB
Such changes cause a difference at 11,500 RMB.
Over the past year, Hawksford’s HR and Payroll Services team has helped foreign-invested enterprises from various fields forecast labour cost changes based on the new tax policies. To help our clients quickly adapt to the new tax regulations, we also managed to adjust their foreign employees’ salary structure.
Apart from the above-mentioned tax-exemption allowances for foreign employees, the other allowances, in theory, will be valid until the authority announces further notice. We will keep you updated with the latest news and policies. Please stay tuned with us for up-to-date information.
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