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Tax-Exempt Fringe Benefits for Expats to Expire Next Year

 

Starting next year, foreigners working in China may no longer be entitled to some tax-free fringe benefits (for example, housing rental, children’s education costs, and language training costs). This will result in larger tax liability on some higher-earning foreign workers. It is highly advisable that relevant foreign employees and their employers prepare for the possible transition as early as possible.
Expatriates working in China enjoy various tax-exempt “benefits-in-kind” (BIK) – sometimes referred to as tax-exempt “benefits” or non-taxable “fringe benefits” (BIK are additional compensation, not included in the salary or wages, but paid on a reimbursement and non-cash basis).However, due to the implementation of the Amended PRC Individual Income Tax (IIT) Law and relevant regulations from January 2019, certain non-taxable BIK will be replaced by additional itemized deductions for some expatriates, while other non-taxable BIK might cease to be exempt from IIT from next year.The policy change has sparked concerns among foreign individuals as well as their employers, who may face an increase of tax burdens or labor costs. This article explains the implications of the changed policy and provides suggestions from tax, HR, and legal perspectives.

What are the tax-exempt benefits-in-kind?

Non-China domiciled individuals working in China can currently enjoy tax-exempt benefits-in-kind, including the below eight categories:

1.Housing expense

2.Education expense for children

3.Language training expense

4.Meal fee

5.Laundry fee

6.Relocation expense

7.Business travel expense

8.Home leave expense

Such benefits-in-kind could be exempt from PRC IIT provided that the expenses are reasonable in amount and there are corresponding supporting documents, such as invoices (fapiao), for each expense. In addition, there are some specific requirements for each category. For example, for home leave expenses, only the travel expenses for the expatriate themself from China to their/spouse’s home country for up to two trips per year could be exempt from IIT.

Three-year transition period for non-China domiciled tax residents

However, with the country’s new IIT Law taking effect from January 1, 2019, the government has considered rolling back the tax exemption on special benefits-in-kind for foreigners, partly in a move to equalize benefits between local and foreign tax resident workers.To ensure a smooth policy transition, at the end of 2018, the Ministry of Finance and the State Tax Administration jointly announced the Notice on the Preferential Policy Convergence Problem (Cai Shui [2018] No.164).The Notice introduced a three-year transition period. From January 1, 2019 to December 31, 2021, non-China domiciled tax residents (who do not have a domicile in China and live for 183 days or more in China in a given tax year) can choose to enjoy:1.The tax-exempt benefits-in-kind;

2.The six additional itemized deductions.

To be specific, the six additional itemized deductions include:1.Children’s education expenses

2.Continuing education expenses

3.Housing mortgage interest

4.Housing rent

5.Healthcare costs for serious illness

6.Expenses for taking care of the elderly

The two policies cannot be simultaneously enjoyed by non-China domiciled tax residents during the transition period. And once decided, non-China domiciled tax residents cannot change their preference within a given tax year.

According to the Notice, after the three-year transition period, that is starting January 1, 2022, non-China domiciled tax residents will no longer enjoy preferential tax-exemption policies on benefits-in-kind, including housing, language training, and children’s education.

Instead, the three categories of benefits-in-kind will be replaced by the corresponding additional itemized deductions (that is, housing rent, continuing education expenses, and children’s education expenses).

However, as to the remaining five categories of benefits-in-kind (namely meal fee, laundry, relocation expense, business travel expense, and home leave expense), the policy has not clarified whether they may continue to be tax-exempt.

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