On 14 March 2019, the Ministry of Finance and the State Taxation Administration jointly issued Caishui [2019] No. 31 (“Circular 31”) – Notice on Preferential Individual Income Tax Policy for the Guangdong-Hong Kong-Macau Greater Bay Area. Circular 31 outlines details of the IIT policy which is designed to attract foreign high-end and urgently-needed talents (including people from Hong Kong SAR, Macau SAR, and Taiwan region) to the GBA.

In order to implement the preferential IIT policy set out in Circular 31, on 22 June 2019, the Department of Finance of Guangdong Province and the Guangdong Provincial Tax Authority jointly issued Yue Caishui [2019] No. 2 (“Circular 2”) – Notice on the Implementation of Preferential Individual Income Tax Policy for the Guangdong-Hong Kong-Macau Greater Bay Area, which sets out the general framework for determining eligibility and extent of the IIT subsidy available under the Policy, amongst other factors.

Circular 2 takes retroactive effect from 1 January 2019 for a trial period of one year, and is subject to review and change after completion of the trial period.

Specific subsidy standards and computation methods

• The municipal governments of Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen, and Zhaoqing in the GBA’s Pearl River Delta (“the Nine Cities”) will offer fiscal subsidy to qualified foreign high-end talents and urgently-needed talents working in the Nine Cities. The subsidy is calculated as the difference between one’s IIT paid on eligible personal income and 15 percent of the taxable value of the same eligible income (“IIT differential”) as follows:
  Subsidy amount = Amount of IIT paid on eligible personal income – the taxable value of eligible personal income X 15%
• The subsidy is exempt from PRC IIT
• The total amount of subsidy due to a qualified talent is computed based on the aggregate value of IIT differential on each eligible personal income category respectively (salaries and wages, personal independent service income, author’s remuneration income and royalty income will be grouped as one category - comprehensive income for PRC residents), and paid once a year.

Personal income eligible for subsidy 

The subsidy will be calculated on the IIT differentials assessed on the following types of personal income (“eligible personal income”):

• Salary and wages;
  
• Independent personal services income;
• Author’s remuneration;
• Royalties;
• Income from business operations;
• Subsidies awarded to individuals who participate in selected talent programmes or projects.

 

Talent mobility within GBA 

Qualified talents who derive eligible personal income from two or more locations within the GBA should apply to the Department of Finance of each city for a proportion of the IIT differentials due from income tax paid in that city. 

Definition of talent

Foreign high-end talents and urgently-needed talents that meet all of the basic criteria below as well as one of the other criteria are qualified to apply for the subsidy:

Basic criteria

Permanent residents of Hong Kong SAR or Macau SAR; Hong Kong residents who are part of the Hong Kong Admission Schemes for talents, professionals and entrepreneurs; residents of Taiwan region; foreigners; returnees with overseas education background  and obtained foreign permanent residence status, and overseas Chinese; Working in one of the Nine Cities and paying IIT in accordance with the PRC IIT law and regulations; Abiding by laws and regulations, and complying with ethics and integrity requirements related to scientific research.

Other criteria

Persons selected by  key national, provincial, or municipal talent programme; persons in possession of “Superior Talent Card” issued by Guangdong provincial authority; persons in possession of  Type A Foreigner’s Work Permit, or Confirmation Letter of High-level Foreign Talent status; and other high-level foreign talents recognised at the national, provincial, or municipal level; Scientific research & development team members that are part of key national, provincial or municipal innovation platforms; and scientific research & development team members at colleges, research institutions, hospitals, or other related organisations; Core technical or skilled personnel or outstanding management personnel employed or establishing businesses in key industries or sectors in Guangdong province; Other urgently-needed talent with special expertise recognised by the Nine Cities.

 

Principles of declaration and recognition

Foreign high-end talents and urgently-needed talents must apply for recognition of their status and eligibility for the subsidy voluntarily and objectively. Detailed standards and operational measures will be subject to local practice to be adopted by authorities in the Nine Cities.

 

Authorities designated to assess eligibility for Subsidy 

Authorities for High-end Talent Assessment	The Department of Science and Technology (the Administration of Foreign Experts Affairs) of each of the Nine Cities
Authorities for Urgently-needed Talent Assessment	The Human Resources and Social Security Department
Authorities for Subsidy Application, Assessment and Distribution	The Department of Finance is the in-charge authority for subsidy application, assessment and distribution. The Department of Finance will lead the subsidy assessment process in conjunction with the Department of Science and Technology (the Administration of Foreign Experts Affairs), the Human Resources and Social Security Department and relevant tax authorities.
Application	The application should be submitted to the local Department of Finance by: The individual applicant; or The person’s employer (recommended)

Standards for identifying talent in each city and measures for subsidy distribution

The Nine Cities shall, in light of actual conditions of the locality, formulate local standards for talent identification and measures for subsidy distribution, and submit their standards and measures to the Provincial Department of Finance, the Provincial Department of Science and Technology (the Provincial Administration of Foreign Experts Affairs) and the Provincial Human Resources and Social Security Department for records by the end of July 2019.

The above-mentioned provincial authorities and the Guangdong Provincial Tax Authority will assist the Nine Cities to identify talent and distribute subsidies in a unified manner.

 

Consequences for violations and false declarations

If an applicant is found to have violated laws or regulations, made false declarations, or committed other infractions, the individual’s enjoyment of the preferential IIT policy will be cancelled, and financial subsidies that have already been issued will be retracted.  If a person is suspected of committing a crime, the individual will be transferred to the judiciary authorities for criminal investigation in accordance with relevant laws.

 

Other matters

Yue Caifa [2012] No. 93 – Announcement on Interim Administrative Measures for the Individual Income Tax Differential Subsidy for Permanent Residents of Hong Kong SAR or Macau SAR working in Zhuhai Hengqin New District, issued by the Department of Finance of Guangdong Province will be repealed effective 1 January 2019.

General framework for talent identification confirmed and detailed implementation rules are required to move the application process forward

Circular 2 is designed to accelerate implementation of the preferential IIT policy set out in Circular 31. The Notice provides the framework for defining talent and the principles for declaration, both of which reflect the preferential policy’s requirement that foreign high-end talents and urgently-needed talents must be working or operating a start-up in the GBA.

However, detailed guidance is needed with regard to the types of industries and areas which will be considered as “key performers” to the Guangdong province.  Input is also needed from each of the Nine Cities with regard to its owned criteria for identifying other urgently-needed individuals with special skills. The policies and measures that the municipalities will submit by the end of July are expected to address these issues. These policies will also elaborate on the specific application procedures, required documents, timeline, and other issues. 

Simple calculation and significant tax relief

Circular 2 clarifies the calculation of the subsidy, which is based on IIT paid in excess of 15% of taxable income. This simple calculation method will help reduce application costs and make the assessment process easier for relevant governmental departments.

In the table below, we have selected the annual salary income levels of RMB 0.72 million, 0.96 million and 1.2 million respectively and compared their effective tax rates before and after enjoyment of the GBA’s tax subsidies. We have also compared the effective tax rates between Hong Kong SAR and mainland China under the same annual salary income level.

Annual Salaries and Wages Income （RMB）	PRC Individual Income Tax Rate before Enjoying the GBA Subsidies （Effective Tax Rate）	PRC Individual Income Tax Rate after Enjoying the GBA Subsidies （Effective Tax Rate）	Hong Kong SAR Salaries Tax Rate （Effective Tax Rate）
720,000	20.15%	13.75%	12.03%
960,000	23.86%	14.06%	13.27%
1,200,000	27.59%	14.25%	14.02%
Notes: The effective income tax rate estimates for salaries and wages in mainland China are based on the assumptions for persons who are PRC tax residents, and the estimates do not consider deductible items other than the standard deduction of RMB 60,000. The Hong Kong SAR income tax rate estimates for salaries and wages are based on the 2019/20 “Single / Separated / Divorced / Widowed” marital status tax rate table, and the estimates only consider the basic allowance—other allowances, deductions and tax reductions have not been taken into consideration. We assume that the employees bear the taxes by themselves.  Also, the exchange rate used for this calculation was 1 RMB = 1.1308 HKD.

The comparison shows that the tax subsidies significantly reduce tax burdens in mainland China, basically bringing tax burdens in line with those in Hong Kong SAR.  In this way, the tax burdens for qualified foreign talent who work in the GBA will be effectively reduced.  If these individuals’ IIT is borne by the companies, the subsidies will effectively reduce companies’ labour costs.

Rearranging business and personnel strategies in the GBA

In light of the GBA’s preferential tax policies, many companies have begun to review their business plan as well as deployment of personnel to/within the GBA with the aim of facilitating overall business and company development.

 

In summary, we suggest that companies consider the following aspects with regard to business development in the GBA:

• Pay close attention to policy updates and development trends in the GBA
• Communicate with relevant government authorities in a timely manner to fully understand the content, requirements and potential impact of policies 
• Based on company strategy, carry out overall operational planning and rearrangements in the GBA, including:
  • Understand and analyse the relevant preferential policies that apply to companies in the GBA, and select suitable locations to establish business operations
  • Review and reorganise company’s business structure and operational model and optimise value chain
  • Review and reorganise personnel arrangements, compensation packages, and apply for GBA’s preferential policies to attract and retain talent required at minimal cost to the company
  • Seek out domestic business development and foreign investment opportunities and ensure any tax planning to be carried out in a compliant manner.

KPMG will continue to update you on the latest GBA policy developments and share our observations and insights through alerts and workshops.