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Individual income tax (IIT) deductions for foreigners working in China.

Individual income tax (IIT) deductions for foreigners working in China

To create a favourable working environment for foreigners, the Chinese government has rules on tax-free allowances applicable to foreigners working in Mainland China. All foreigners and their employers should be aware of these rules to ensure that they do not pay more individual income tax (IIT) than they must.

Tax-free items in China for foreigners

According to the currently effective regulations, the overview below shows the tax-free items, which allow foreign employees to enjoy:

Tax-free itemDescription
Rent
  • If in the form of non-cash (i.e. the rental contract is with the foreign employee expatriate who applies for reimbursement of rent paid, or the company remits rent directly to the landlord on behalf of the foreign employee with a tripartite agreement or supplementary explanatory materials).
  • Rent amount must be reasonable and supported by valid fapiao issued to the company.
Relocation
  • If in the form of reimbursement to the expatriate.
  • Expenses (e.g. flight, luggage, moving company, etc.) must be real, reasonable and supported by valid fapiaos or receipts (if incurred outside Mainland China).
  • Fixed monthly relocation allowances are taxable.
Home trip
  • If in the form of reimbursement to expatriate
  • Expenses (e.g. flight, train, taxi) must be real, reasonable, and supported by valid fapiaos or receipts (if incurred outside Mainland China).
  • Up to two roundtrips per year.
  • Travel must be between the city in Mainland China where the expatriate works and the city where the expatriate/spouse/parents are from or currently live.
  • Any allowance paid for the expatriate’s family will be taxable.
School fees
  • Expenses must be reasonable and supported by valid fapiaos and documents on school information.
  • The school must be registered and located in Mainland China.
  • Other fees (e.g. meals, school bus, uniforms) are usually deemed taxable.
Business trips
  • Expenses must be reasonable and supported by valid fapiaos and documents regarding transport and accommodation expenses or present the business trip plans arranged by the company
Meal, groceries and laundry
  • Expenses must be real, reasonable and supported by valid fapiaos.
  • Expenses must have been incurred in Mainland China.
  • Any fixed monthly allowance for expenses is taxable.
Chinese lessons
  • Expenses must be reasonable and supported by valid fapiaos.
  • Language school must be in Mainland China.
  • Language courses provided to the expatriate’s family members are taxable.

Foreigner tax benefits and fapiao information

Fapiao type Fapiao name Fapiao remark Contract Receipts/sales list
Normal Special
Housing √EmployeePeriod, the name of the landlord and the house address.EmployeeBank receipts
TuitionThe employee or the kidPeriod, the kid’s name (if the fapiao name is the employee).Employee
  • Bank receipts.
  • Admission letter with the kid’s name.
  • Certification for the relative relationship between employees and kids.
MealsEmployeePeriodN/ABills (if any)
Taxi/DidiNil/EmployeePeriodN/ABusiness trip plans
TrainEmployeePeriodN/ABusiness trip plans
FlightsEmployeePeriodN/ABusiness trip plans
LaundryEmployeePeriodN/ASales lists (if any)
Chinese lessonsEmployeePeriodEmployeeBank receipts

Q&As

We have prepared a Q&A section to deal with some questions that we frequently receive from our clients:

Should IIT exemptions be approved in advance?

Although it is not necessary to obtain the tax bureau’s approval in advance, a detailed breakdown of tax-free items must always be provided during the monthly IIT filing. The tax bureau can at any time decide to audit supporting documents, and some tax bureaus still require the submission of related materials at filing.

A lot of expenses must be reasonable. What does this mean?

The tax bureau has full discretion to determine whether an expense is reasonable. For example, whether the corresponding rent matches the market price. In addition, in some cases, there may be internal criteria for judgement (e.g. in some Shanghai districts, the rental fee may not be more than 30% of the total salary, but in most situations, there is not).

Note, however, that first and foremost the tax officers will pay attention to whether the expenses are real.

Do residents of Taiwan, Hong Kong and Macao enjoy the same benefits as foreigners?

Legally speaking, residents of Taiwan, Hong Kong and Macau cannot enjoy the same benefits as foreigners because the policy does not extend these benefits to them.

In practical terms, some local tax bureaus might not raise objections to residents of Taiwan, Hong Kong and Macau benefiting from these rules. However, it is advisable to verify this with the local tax bureau. Nevertheless, there are still potential risks involved.

Do these deductions apply to foreign individuals who work in Guangdong Province but live in Hong Kong or Macau?

Yes, they do if their expenses match the requests.

In addition, foreign individuals working in Guangdong Province may be able to apply for an even better preferential tax treatment (such as a 15% IIT cap), based on criteria given by the city they work in.

Will the rules change?

This preferential treatment has already been extended from 2021 to 2023 and then from 2023 to 2027, so current deductions are in place until the end of 2027. If the arrangement is not extended, then expatriates in Mainland China will only be eligible for the same deductions as Chinese nationals, which are generally much less favourable.

I work for a small company that may not have the expertise to ensure that all deductions are applied correctly. What can I do?

Chinese tax laws are complex, and the penalties for tax evasion and non-compliance can be very severe. Therefore, we recommend that smaller international companies outsource the IIT tax filing work to an external agent or corporate service provider who is fully familiar with the requirements for deductions and staying up-to-date with all policy changes.

Conclusion

Understanding the tax-free allowances and deductions available to foreigners working in Mainland China is crucial for both employees and employers to ensure compliance with Chinese tax regulations. These rules not only help expatriates minimise their individual income tax burden but also contributes to creating a favourable working environment for foreign talent in China.

Moreover, the need for proper documentation, such as valid fapiaos and receipts, cannot be emphasised enough, as these documents serve as evidence to support tax deductions during the monthly IIT filing. Despite the absence of a requirement for advance approval from the tax bureau, meticulous record-keeping and adherence to regulations are crucial, as tax authorities retain the right to audit supporting documents at any time.

While the current tax benefits have been extended to 2027, there is always a possibility of policy changes in the future. Therefore, staying informed remains vital for ensuring compliance and maximising tax advantages. Acclime’s expertise and up-to-date knowledge can help navigate these potential changes, providing proactive guidance and strategies to adapt to evolving tax landscapes effectively.

Contact our teams for expert support and further information about accounting & tax requirements in China to ensure you are compliant in the market.

Christophe Marquis, Director, Shanghai, y.shi@acclime.com
Mei Qian, Accounting Services Director, q.mei@acclime.com
Emily Shi, Partner, y.shi@acclime.com


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About Acclime.

Acclime is Asia’s premier tech-enabled professional services firm. We provide formation, accounting, tax, HR and advisory services, focusing on delivering high-quality outsourcing and consulting services to our local and international clients in China and across the region.

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