Preferential foreigner income tax honeymoon in China to end in 2022

For several years, China has attracted foreign talent to work in the country through generous taxation policies, which allows for part of an expat's salary package and expenses to be tax-exempt.

From the 1st January 2022, a number of these benefits are due to come to an end, which could significantly increase the amount of individual income tax (IIT) a foreigner would have to pay in China from next year.

Under the current model, expatriates working in China are generally allowed to claim approximately 30% of their gross salary as tax-exempt for ‘reasonable’ expenses including housing rental, children’s school fees, flights to their home country and other relevant expenses.

From 1st January next year, they will be replaced by just three claimable allowances, which are housing rental, continuing education expenses, and children’s education expenses, but the amount claimable as tax-exempt will be much lower than it is now.

The new policy – how it will impact expats

To give an example of how the new policy could impact a foreigner’s take home pay in China, the cost of international education in China is very expensive (ranging from RMB 150,000 – RMB 300,000 per year).

Under the current policy, the foreign staff member would be able to claim this expense as exempt from IIT, but under the new policy, they would only be able to claim RMB 1,000 per month, per child as being exempt.

For rental apartments, foreigners present a government fapiao (receipt) for the cost of their rent which can again be claimed as IIT exempt. From 2022, the amount that can be claimed as exempt will be capped at RMB 1,500 per month.

Clearly, these new policies will impact those earning higher sums than those expats on more modest salaries, but for all concerned, it is likely to lead to a considerable decrease in expats' pay.

How to prepare for this change

The policy implementation date is still six months away, but many foreigners and their companies are considering their options as to how they can mitigate the costs resulting from this shift in rules.

Several international Chambers of Commerce in China are also lobbying the government to attempt to have an extension or amendment to this policy, but there is no guarantee that this will happen.

In the meantime, it is wise for businesses and their expat staff to consider their options ahead of this change. Gemini’s Staffing and Payroll team can advise and update on the latest news on the ground to keep you and your staff informed and prepared.