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 have to.
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 minimise payable IIT:
|Meals, groceries and laundry|
We have prepared a Q&A 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 or not an expense is reasonable. In some case there may be internal policies (e.g. in some Shanghai districts, the rental fee may not be more than 30% of the total salary) but in most situations, there are not.
Note, however, that first and foremost the tax officers will pay attention to whether or not the expenses are real.
Do these rules apply to residents of Taiwan, Hong Kong and Macao?
Yes. Although Taiwan, Hong Kong and Macau are part of China, their residents enjoy the same benefits as foreigners.
Do these deductions apply to foreign individuals that work in Guangdong Province but live in Hong Kong or Macau?
Yes they do, even if these individuals travel back and forth on a daily basis or if the expense was incurred in Hong Kong or Macau. Foreign individuals working in Guangdong Province may be able to apply for a even better preferential tax treatment (such as 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 to 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 in the correct way. What can I do?
Chinese tax laws are complex, and the penalties on 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 that is fully familiar with the requirements for deductions and staying up-to-date with all policy changes.