Hey guys and gals, good news. As some of you may have heard, last week the Chinese government decided to extend the preferential foreigner income tax (IIT) policy regarding tax-deductible expenses until the end of 2023. The practice of deducting expenses from your taxable income was due to end this month (Jan 2022), but alas, the CPC has gone back on their initial plans. This means that, whether you were already doing this or not, you have 2 more years to benefit from the preferential IIT policy & save more money.
In light of this welcomed plot twist, it’s important that everyone understands what the expat IIT preferential tax policy is, how to benefit the most from it and how you go about actually receiving these tax breaks.
To clarify, the reason expats benefit from a preferential tax policy by taxable income deductions in the first place is because Chinese citizens have a similar benefits system. Chinese citizens can opt into a government application where the government rewards tax breaks based on multiple circumstances (kids, school, rent, caring for family, properties…etc).
Foreigners get a simplified version of this.
Foreigner income tax policy: How much can you save?
According to the Chinese Individual Income Tax Law, foreign nationals are allowed to deduct expenses from their gross salaries when calculating taxes. These expenses can amount to no more than 30-35% of your yearly gross income. Because of the way the income tax brackets work in China, this deduction to your taxable income can save you an increasingly significant amount of money the higher you are on the tax bracket. The more you make, the more money you can save basically.
For example: say you make CNY40,000 per month, that’s CNY480,000 per year. Everything above 420,000 is taxed 30% so 60,000 x 30% = 18,000. The following 120,000 are taxed 25% so 120,000 x 25% = 30,000… and so on… 156,000 x 20% = 31200. 108,000 x 10% = 10,800. 36,000 x 3% = 1080.
18,000 + 30,000 + 31,200 + 10,800 + 1080 = CNY91,080
Someone making CNY480,000 per year will pay CNY91,080 in taxes without applying tax deductible expenses.
Now lets try with expenses deducted from taxable income:
CNY480,000 x 30%(maximum expenses) = CNY144,000 in expenses. New taxable income = CNY336,000
36,000 x 25% = 9000
Copy/pasta: 156,000 x 20% = 31,200. 108,000 x 10% = 10,800. 36,000 x 3% = 1080.
9000 + 31,200 + 10,800 + 1080 = CNY52,080
The same person making CNY480,000 per year will pay CNY52,080 in taxes with tax deductible expenses.
That’s CNY39,000 saved in a year, almost a tax-free month’s salary.
What can you expense off of your taxable income?
- Housing/Rent: Whether you are renting from a landlord or an agency, you can expense your housing costs.
- Kids education: You can expense the school fees for your kids. Because you have kids right?
- Language training: That’s right, you can expense Chinese language learning classes. So keep your new year’s resolution for once and go learn Chinese.
- Meals: You can expense work-related meals.
- Transportation: You can expense work-related transportation including business trip expenses.
- Home leave: You can expense up to two trips to your home country per year.
- Healthcare for serious illness: You can expense medical bills for medical emergencies. (up to CNY80,000)
Each of these expenses must have supporting documents such as a fapiao.
How do you deduct these expenses from your taxable income?
The fapiaos and other supporting documents must be presented to your company’s accountant (who must be Chinese in China) or the 3rd party agency in charge of your company’s bookkeeping.
The Tax Deduction Policy for Chinese Citizens
As previously stated, Chinese citizens also have their own tax deductible policy. Foreigners were due to transfer to a similar system starting January 2022, but the details of such a change were never finalized and the government has pushed any such changes to the end of 2023. So, if you’re curious about what the individual income tax policy might look like for foreigners in 2024, then the best thing to do is look at the current Chinese IIT policy.
The Chinese tax deductibles
While expats have to provide corresponding invoices or receipts every month for each expense in time, Chinese citizens do not. All Chinese taxpayers, high or low income, can claim deductions directly through the government tax filing app or via their employer, once they obtain their tax ID in the tax bureau. No need to keep piles of invoices in storage anymore.
|Housing rent & interest expenses||800, 1000, 1500 RMB/month(according to different city scales)|
|Kids preschool & academic education costs||1000RMB/month/child, 400-3600RMB/adult|
|Support the elderly||≤1000 RMB, 2000 RMB (only-child）|
|Medical care for serious diseases||≤80, 000 RMB|
As a certificated HR&payroll company, HROne can help companies with foreign employees to keep in line with the benefits and save money. For questions and cooperation please contact us at [email protected]