- The Ministry of Finance, and State Taxation Administration recently issued three collective circulars, the Announcement on Measures for Individual Income Tax (“IIT”) Administration on Operating Income from Equity Investment (“Announcement No. 41 of 2021”), the Announcement on Extending Preferential Individual Income Tax Policies on Annual Bonuses and Others (“Announcement No. 42 of 2021”), and the Announcement on Extending Preferential Individual Income Tax Policies on Allowances for Foreign Nationals and Others (“Announcement No. 43 of 2021”). The circulars laid down the grounds for income assessment methodology for income generated from sole proprietorship and partnership, and echoed the voices of the general public on extension of some of the major preferential IIT policies. These policies will undoubtedly benefit salary income earners, encourage entrepreneurship, whilst strengthening IIT compliance in the long run.
The Ministry of Finance and the State Taxation Administration jointly promulgated the following new policies at the end of 2021, which have profound impact on the PRC IIT framework and individual taxpayers.
30 December 2021
- Announcement No. 41 of 2021: Starting from January 1st, 2022, all sole proprietorships and partnerships holding equity investments1 will be subject to audits for IIT assessment and reporting purposes.
31 December 2021
- Announcement No. 42 of 2021: Preferential IIT policies on annual bonuses and equity incentives granted by public companies have been extended to December 31st, 2023 and December 31st, 2022 respectively.
- Announcement No. 43 of 2021: Preferential IIT policy of tax exemption treatment of benefits-in-kinds provided to foreign nationals working in the PRC have been extended to December 31st, 2023.
1. Equity investments such as holdings of equity, stocks, and shares in the property of a partnership.
Changes to income assessment methodology for operating income from equity investment
Starting from January 1st, 2022, sole proprietorship and partnership holding equity investments shall:
- be subject to audits for IIT assessment and reporting purposes;
- report any equity investment to the tax authorities within 30 days from the date of holding; and
- in the case of those already holding equity investment prior to January 1st, 2022, report their equity investments to the tax authorities by January 30th, 2022, and be subject to audits for IIT assessment and reporting purposes.
Continuation of major existing preferential IIT policies
A summary of provisions regarding the continuation of major existing preferential IIT policies is set out as follows:
|Nature/Type of Income
|Related tax treatment
|31 December 2023
|Equity incentives granted by listed companies
|31 December 2022
|Benefits-in-kinds for foreign nationals
|31 December 2023
|Exemption from annual IIT reconciliation for comprehensive income
|31 December 2023
The changes to tax regulations reflect the authorities’ intent to reduce the IIT burden on salary income earners, whilst enhancing the administration of IIT from high-income earners who derive income from sole proprietorships and partnerships. Companies and individuals are suggested to consider the following items in their planning:
- Whilst the preferential IIT policies on equity incentives granted by public companies are extended to the end of 2022, and the preferential IIT policies on annual bonuses, benefits-in-kinds for foreign nationals are extended to the end of 2023, companies and individuals should keep abreast of relevant policy developments and budget for future cost increment and talent retention programs before expiry.
- The extension of preferential IIT policy on equity incentives granted by public companies includes stock options, stock appreciation rights, restricted stocks, and other equity-based awards granted to individuals. Companies should comply with the tax reporting requirements in respect of equity plans in order to secure the preferential tax treatment, and seek professional advice to assess appropriate tax treatment where are in doubt.
- The existing IIT subsidy policy in the Great Bay Area will also expire at the end of 2023. Companies and individuals should also closely follow the developments on any possible changes and extensions to the policy, and devise plan to align corporate and talent strategies.
- Individual investors in sole proprietorships and partnerships should comply with the new income assessment rules for IIT reporting purposes in a timely manner.
- High-net-worth individuals should keep abreast of policy developments and seek professional advice on their tax compliance status and enlist assistance with complying with the relevant tax compliance requirements.
Personal tax affair is a complex matter, and we would be pleased to support where you require a professional opinion. We will keep track of the latest updates on tax regulatory and practice changes, and share our insights in due course.