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Responses to China's Tax Extensions for Expatriates

You've seen news floating by now. But grab a cup of coffee, and dive into this piece for some interesting perspectives on the news.
2022-01-01 15:00:00

Earlier this year, we wrote about how the preferential tax exemptions for foreigners would be expiring in January of 2022 (like... today).

However, this week saw two major announcements. You are going to want to read this in detail.

First, China's State Council announced that one-time annual bonuses can continue to be taxed separately at a prefential rate. Up until yesterday, companies could either a) include annual-one time bonuses as part of annual comprehensive income, or b) they could have it be taxed separately at a lower rate. Option B was set to expire yesterday, but has been extended to December 31st, 2023.

Vice President of the European Chamber of Commerce, China Carlo D'Andrea said

"The European Chamber welcomes the State Council's announcement that bonuses for employees will continue to be taxed separately at a preferential rate until the end of 2023, which is positive for Chinese and foreign employees alike."

Second...and this one is BIG: China's Ministry of Finance announced yesterday (December 31st) at 6pm, that the preferential individual income tax exemptions for foreigners (Education, Housing, etc) will also be extended until December 31st 2023. Here's a rough translation of the announcement:

ANNOUNCEMENT:

A continuation of the the preferential individual income tax (IIT) exemption policies.

In order to further reduce the burden of taxpayers, these individual income tax policies will be extended:

The implementation period for [a] preferential policies on subsidies for foreign nationals, and [b] separate tax calculation of preferential policies on incentives for the tenured heads of large enterprises has been extended to December 31, 2023.

Reference: Notice of the State Administration of Taxation of the Ministry of Finance on The Convergence of Relevant Preferential Policies after the Revision of the Individual Income Tax Law > (Finance and Taxation (2018) No. 164)

This is big news because the loss of these preferential IIT exemptions meant that some foreigners in Shanghai would have their tax burdens increased significantly. This centers primarily around education expenses where a single child's tuition can be anywhere between 200k - 350k+ per year. Having education expenses as tax deductions helped offset the high cost of education here.

Why is education so expensive for foreigners? Contrasting to how foreigners have access to public hospitals in China... children with foreign passports are only guaranteed publice education from grades 1-5, while pre-school and high-school are not available. Therefore the only choice that is available are private bilingual or international schools. David Ingram, Founding Head of College, Dulwich College Shanghai Puxi believes "...this is a highly positive announcement for the international education sector here in China. It keeps Shanghai as an international destination for education, and a destination of choice for the world's best educators. What a positive way to start 2022 and the year of the tiger."

Executive Director James Dunn of the British Chamber of Commerce Shanghai had this to say:

Excellent news by the ministry of finance yesterday regarding the extension of the IIT policy for foreign employees. The Chambers collectively have been lobbying extensively locally and nationally to extend this policy. The change would have made it substantially more expensive for companies to hire foreign employees and to live in China, so this signifies the importance of keeping foreign businesses and nationals in China.

China continues to be the go-to-market for businesses around the world, and I'm sure many companies tonight will be relieved to hear this fantastic news.

Carlo D'Andrea adds "We have pushed for the extension of non-taxable allowances for three years, and in 2021 wrote an advocacy letter to China's top leadership, and never stopped lobbying for this. We truly feel that by making China an attractive place for foreign talentwill create many positive outcomes, in competition, innovation, and international relations, and are glad that China's government bodies engaged in discussion with us."

What does this mean for foreigners?

The first piece of news means that your annual bonus can continue to be counted separately from your annual salary. If you are someone who receives a large portion of your income from annual bonuses, this will relieve your tax burden.

Second, if you used to be able to deduct education, housing, or language fees from taxes, you will still be able to do this next year.

What does this mean for Shanghai?

There has been a ton of doom and gloom predicting that because these tax exemptions won't be extended that there would be a "mass exodus" from China (something that SmartShanghai's numbers do not support, in fact our traffic data shows a whopping 23% increase in user populations 45 years and older compared to last year). But it appears that China is making efforts to court foreigners, and to retain foreign companies. This seems to be inline with amajor landmark deal between China and the EU solidifying a huge investment pact as well as China simplifying and relaxing rules for foreign investment.

We asked the folks at Dezan Shira & Associates for any insights they had. Maria Kotova, Head of UK & Ireland Business Development said

"2020 saw a trend for us, in providing services to businesses that needed to close down operations in China or ramp-down. But because China was able to recover quickly, this presented China to the world as a very exciting (and stable) market opportunity while other economies were facing uncertainy and unpredictability because of COVID. This year we have seen a surge of foreign multi-national clients, espescially in the FMCG space begin their incorporations into China with the intention of beginning operations here within 2022 and beyond. We've also had to help these clients bring in new senior executive leadership and set-up talent. Those old expat packages we thought were disappearing and making a come-back, espescially with China's recent announcement that they would begin accepting PU letters for family members."

Marco Pearman-Parish CEO of Corporation China and Managing Director of Yingke Matrix, a subsidiary ofYingke Law firm agrees.

"As one the largest foreign direct investment companies in China, we found that many of our foreign MNC clients have been waiting for the decision on this law. And this was going to be a determining factor for their plans for expansion. Also for companies coming into China (inbound, this is going to be really good news for them as well, relieving concerns over tax implications). This wasn't just a concern for big companies, but also for individuals, espescially those in senior leadership positions. Based on our conversations with a wide variety of clients and contacts in a number of industries, this is really good news that will likely create some very positive cascading outcomes for 2022. "

Raphael Coelho, CEO of Popeyes agrees with the sentiment that there is positive prospects for foreign brands in China, and even more so with these tax announcements.

"China has been and will continue to be the greatest growth opportunity for several brands around the world with ambitious expansion plans. Popeyes for example opened its first store in May of last year during a lot of uncertainty only two months after lock-downs. And since then, we've expanded to 9 stores across China within a year and we have big plans for 2022.Attracting and retaining talent is paramount to succed in this journey so this piece of news comes as an early gift in 2022 reinforcing our confidence that Shanghai will remain as a top choice for global talent to develop their careers."

If there is anything that would be nice to read during a January 1st hangover, this is it!

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