Change of Policy on Allowances and Subsidies for Foreign Individuals
In 2018, the Chinese Income Tax Law had been comprehensively reformed. This reform already came into force on 1 January 2019. Over the past three years it has been implemented accordingly. The three-year transition period for the implementation of the specific implementation regulations for individual income tax will expire at the end of 2021. These implementation regulations will affect, among other things, the tax-free amounts and benefits for foreign nationals working professionally in China.
From 1 January 2022, foreign nationals will no longer enjoy a general tax exemption for allowances for housing costs, language courses and education costs for children. Instead, foreign citizens will be able to claim additional special deductions if they qualify as residents of China ("resident individuals"). This is an alignment with the regulations for Chinese citizens. Foreign citizens who do not qualify as "resident individuals" cannot claim additional special deductions.
- Definition of "resident individuals”
According to Article 1 of China's Income Tax Law, persons who have a residence in China or persons who do not have a residence in China but have stayed in China for a total of 183 days or more within a tax year are considered residents.
A "residence in the territory of China" means that one usually stays in the territory of China due to a permanent residence or due to family or economic interests. In practice, the duration of stay in China of a total of 183 days or more per year is regularly the decisive factor.
- What do the special additional deductions include?
Special additional deductions include expenses for children's education, further education, medical treatment for serious illnesses, interest on home loans or house rent and support services for the elderly and can be deducted directly when calculating taxable income. However, there is a standard rate for each type of additional special deduction. For example, the cost of full-time education for the academic qualification of the taxpayer's children can be deducted at a standard rate of CNY 1,000 per child per month. The cost of renting a house at the place of employment by the taxpayer who does not own a house in at his place of employment can be deducted at standard rates of CNY 1,500 / CNY 1,100 / CNY 800 depending on the size of the city.
Foreign persons who previously enjoyed or still enjoy general tax exemptions for housing allowances, costs for language courses and education costs for children will therefore have additional tax burdens as of 1 January 2022.
- Do the special additional deductions have to be applied for?
Foreign persons must provide their payroll department with the necessary information on the fulfilment of the requirements for receiving the special additional deductions so that it can make the corresponding deduction from the taxable income when paying the salary.
If you have any questions regarding the amendment and implementation of the policy on allowances and subsidies for foreign persons, please feel free to contact us.