In late August 2023, the People’s Republic of China (“China” or “PRC”) tax and securities regulatory authorities jointly released announcements which extend the preferential individual income tax policies for equity / incentive compensation, tax-exempt benefits-in-kind for foreign nationals, annual bonuses, and gains from qualified investments in Hong Kong until 31 December 2027.1 The State Council subsequently released Notice on Raising the Additional Itemised Deductions for Individual Income Tax (Guo Fa No. 13 of 2023), which further reduces the income tax burden for individuals who have children to raise or elderly people to support.
WHY THIS MATTERS
The aforesaid tax polices take into full consideration the structure of taxpayers' remuneration and benefits as well as their actual cost of living at different stages and will reduce the overall tax cost of the working class in a targeted manner, reflecting the government’s stated aim to ease individual and family financial burdens, promote economic development, and improve livelihoods.
Extension of Four Preferential Individual Income Tax Policies
The extended preferential individual income tax (“IIT”) policies are summarised as follows.
Type of Income |
Tax Treatment |
Valid Until |
1. Equity incentives of listed companies |
§ Eligible equity income received by resident individuals is taxed as a separate source of income from the employee’s comprehensive income and annual comprehensive income tax rate is applied. § Multiple equity income received during a year is combined and taxed together. |
31 December 2027 (original expiration date: 31 December 2023) |
2. Benefits-in-kind (“BIK”) for foreign national employees |
§ Provision of certain types of BIK (housing, language training, and children’s tuition) to employees of foreign nationality can be treated as tax-exempt benefits if certain conditions are satisfied. § Resident individuals of foreign nationality can either opt for additional itemised deductions or adhere to the tax-exempt BIK policy, and the option shall remain unchanged during a year. |
|
3. Annual bonus |
§ Annual bonus of resident individual is eligible to be assessed on a separate basis on which the tax payable is calculated at the applicable monthly tax rate for comprehensive income on the bonus amount divided by 12 over a period of 12 months. § Resident individuals can also elect to aggregate the annual bonus to comprehensive income and tax them together. |
|
4. Gains from qualified investments in Hong Kong |
§ Gains from investments by mainland individual investors through the Shanghai-Hong Kong Stock Connect, the Shenzhen-Hong Kong Stock Connect, and from the trading of Hong Kong fund units under the mutual recognition of funds are temporarily exempted from IIT. |
Source: KPMG in the People’s Republic of China
Increased Deductions for Three Additional Itemised Deductions
The increased deductions for additional itemised deductions are summarised as follows.
Deductions |
Previous Standards (RMB) |
Updated Standards (RMB) |
|
1. Children's education |
1,000 per child per month |
2,000 per child per month |
|
2. Care for infants under the age of 3 |
1,000 per infant per month |
2,000 per infant per month |
|
3. Support elderly |
Single child |
2,000 per month |
3,000 per month |
Not single child |
2,000 per month; Split between siblings: maximum claim is 1,000 per month for any person. |
3,000 per month; Split between siblings: maximum claim is 1,500 per month for any person. |
|
Source: KPMG in the People’s Republic of China
[RMB 1 = EUR 0.128 ׀ RMB 1 = USD 0.137 ׀ RMB 1 = GBP 0.11 ׀ RMB 1 = AUD 0.214 (Source: www.xe.com)]
The above updated deduction standards shall come into effect retroactively from 1 January 2023.
With respect to taxpayers who had already claimed the deductions for 2023 (before the tax notice was released) starting from September 2023, the tax-filing system will calculate the tax payable in accordance with the updated deduction standards, and the overpaid tax for previous months can automatically offset the tax payable for subsequent months of the year. Those who still have overpaid tax for the year can enjoy the full deductions via the 2023 annual tax reconciliation.
(Note: Other administrative affairs relating to the additional itemised deductions remain unchanged. Details were discussed in Issue 29 and Issue 7 of “China Tax Alert” published by KPMG in the People’s Republic of China in December 2018 and April 2022 respectively.)
KPMG INSIGHTS
The aforesaid policies may benefit companies and employees. However, bear in mind that tax compliance administration exercised by the tax bureaux will be strengthened in the future. In our view, the tax authorities aim to:
- enforce collection of IIT due from equity incentive compensation and annual bonuses;
- strengthen administration of equity plan tax registration;
- strengthen administration of the appropriate use of preferential tax treatment on BIK of foreign national employees;
- strengthen administration of relevant additional itemised deductions.
While enjoying the extended preferential tax policies, it is recommended that companies take the following actions to manage the potential tax risks:
- Companies with equity incentive plans
- Establish an equity tax registration compliance calendar and corresponding standard operation procedure (SOP) in order to meet Chinese compliance requirements;
- Complete equity plan tax registration timely upon new grant/vest/exercise;
- Conduct a tax compliance “health check” on equity / incentive compensation, and identify gaps for possible tax remediation, if required.
- Companies with foreign national employees
- Establish tax-efficiency programme on BIK for foreign employees if not subject to the tax-free benefits previously;
- Conduct self-review of previous expat BIK claims and identify deficiencies in existing BIK programme;
- Update BIK tax-efficiency policies if necessary.
- Notes for claiming additional itemised deductions
Taxpayer |
|
Employer |
Employers are recommended to communicate with the relevant Chinese and foreign employees, and especially remind the following employees to submit their deduction information via mobile APP as early as possible for them to enjoy the tax benefit in due course:
|
Source: KPMG in the People’s Republic of China
Taxpayers shall be responsible for the authenticity, accuracy and completeness of the information provided for the claim of additional itemised deductions. If false/mistaken claims are discovered in the administration process, withholding agents shall remind their employees to correct the claims and notify the tax authority if the individual concerned refuses to make the corrections.
Companies may wish to consider reviewing their information collection and administration procedures for employees’ additional itemised deductions claims, and make necessary adjustments to their existing tax and HR policies and administration procedures, so as to be compliant with relevant tax reporting requirements and enhance internal administrative efficiency.
There are many details in these announcements which may be challenging to assess and incorporate into taxpayers’ compliance obligations. Any questions or requests for guidance should be directed to your usual qualified tax professional or a member of the tax team with KPMG in the People’s Republic of China (see the Contacts section).
FOOTNOTE
1 Announcement on Extending Individual Income Tax Policies on Equity Incentives of Listed Companies (Announcement No. 25 of 2023), Announcement on Extending Individual Income Tax Policies on Allowances for Foreign Nationals (Announcement No. 29 of 2023), and Announcement on Extending Individual Income Tax Policies for Annual Bonuses (Announcement No. 30 of 2023).
Announcement on Extending Individual Income Tax Policies Relating to Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and Mutual Recognition of Funds between Mainland China and Hong Kong (Announcement No. 23 of 2023) jointly issued by the MOF, STA, and China Securities Regulatory Commission.
RELATED RESOURCE
This article is excerpted, with permission, from China Tax Alert (Issue 15, September 2023), a publication of the KPMG International member firm in the People’s Republic of China.
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Appendix: Additional itemised deductions (increased deductions for "supporting elderly", "children's education" and "care for infants under the age of 3" take effect from 1 January 2023)
Item |
Key qualifying conditions |
Standard fixed amount for deduction (RMB) |
Who can claim? |
When can claim? |
||
Children's education |
Pre-school |
3 years onwards |
2,000 per child per month |
50% for each parent / 100% for either parent |
From the month when the child is over 3 years old until the end of full-time education (for children receiving education outside China, relevant supporting documents are required) |
|
| Compulsory education |
Primary & middle school | |||||
Intermediate education |
High school, Vocational school |
|||||
Higher education |
Degree, Masters, Doctorate | |||||
Further education |
Formal education |
Educated in China |
400 per month |
Individual taxpayers |
From the month of enrollment to the end of continuing education, a maximum deduction period of 48 months for the same degree |
|
Professional education |
Technical / professional certificates |
3,600 |
The year which the certificate is obtained |
|||
Serious illness medical fees |
Medical expenses (self-paying portion of the medical insurance) > RMB 15,000 |
Actual expense not exceeding 80,000 |
Individual taxpayers or his/her spouse. The medical fee for minor children can be deducted by either parent. |
The year that actual medical expense happens |
||
Mortgage interest |
Limited to the first property only |
1,000 per month |
If jointly owned, either husband or wife to claim; cannot enjoy housing rental deduction at the same time; 50% for each of the couple or 100% for either if each take out a first mortgage before marriage |
From the beginning month to the ending month of loan contract or to the termination month of repayment, a maximum deduction period of 240 months |
||
Housing rental |
Not owning property in place of work |
Big cities |
1,500 per month |
If joint rental, either husband or wife to claim; cannot enjoy mortgage interest deduction at the same time |
From the beginning month to the ending month of the lease term, subject to the actual lease term |
|
Mid-size (population) > 1m |
1,100 per month |
|||||
Smaller (population) < 1m |
800 per month |
|||||
Supporting elderly |
60 years or older parents or other obligations by law |
Single child |
3,000 per month |
Individual taxpayers |
From the month that the elderly person is 60 years old to the end of year of which the supporting obligation is terminated |
|
Not single child |
3,000 per month; Split between siblings: maximum claim is 1,500 per month for any person |
|||||
Care for infants under the age of 3 |
Infants under the age of 3 |
2,000 per infant per month |
50% for each parent / 100% for either parent | From the month the infant is born until the month before the infant reaches the age of 3 |
||
Source: KPMG in the People’s Republic of China
The information contained in this newsletter was submitted by the KPMG International member firm in the People’s Republic of China.
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