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) then they have to.
According to the current 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:
Yes. The new Individual Income Tax Law that took effect on January 2019 introduced an annual personal income tax settlement system. This makes it now possible to apply for IIT deductions retroactively until 30 June of the following year.
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 submission of related materials at filing.
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.
Yes. Although Taiwan, Hong Kong and Macau are part of China, their residents enjoy the same benefits as foreigners.
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.
The current deductions are in place until the end of 2021. 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. However, as this would have a very big impact on companies, there is at least a reasonable chance that the current rules will be extended.
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.