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Intro: Foreigner income tax dilemma
Hey guys and gals, we’re in late August, summer is ending, and as I’m sure you’ve all heard by now, things are about to change for foreign working professionals in China this coming January. Some of us will be affected a lot and others… not so much. Regardless, these new foreigner income tax policies are going to affect everyone working here on a work visa, so it’s important that everyone understands exactly what these new taxes for foreigners are, what you’re getting into by paying for the social benefits and what this all means in the long run.
The first thing we should clear up is that this isn’t just about one policy change, but rather a series of changes to the foreign individual income tax (IIT) that are all happening around the same time. It “starts” or rather “started” with the changes to the Chinese social benefits contribution and will continue with the end of allowances through tax deductions for working foreigners in January 2022.
Healthcare Insurance & Pension Fund
The new social benefits IIT law makes paying for social “benefits” mandatory as opposed to optional for foreigners.
Starting in mid-August 2021, the government said they would start enforcing the social benefits contribution (healthcare insurance and pension fund) for foreigners and issue hefty fines to companies and employees for not complying.
The social benefits include: the housing fund, the healthcare insurance and the pension fund. Foreigners are exempt from the housing fund, so we’re not going to go into that one.
Without going into too much details here, the healthcare insurance takes 2% off your gross salary and provides an ok insurance at Chinese public hospitals. The pension fund takes 8% off your gross salary. Together, that’s 10% of your gross salary going to social benefits. You can claim both of these funds back when you leave China. Your full pension and what you didn’t use on your healthcare insurance will be paid back to you, but for most foreigners 10% less cash in hand is an inconvenience to say the least.
No More Allowances – Coming January 2022
In the current version of the Chinese Individual Income Tax Law, foreign nationals (and locals) are allowed to deduct expenses from their gross salaries (up to 30%) when calculating taxes. Common expenses include rent, meals, school fees for those of us who have kids, and other things deemed “acceptable” by your companies.
In January 2022 the new IIT law will go into effect and make it so that foreigners can no longer deduct expenses off of their taxable incomes. Understandably, this is the “smackdown” change that will see a lot of foreign nationals leave China. The more money you earn, the more you are affected by this policy. In other words, the more money you earn, the more likely you are to leave China over this.
For example let’s take “Dave”, an expat on a ¥1,000,000 yearly package. He pays ¥200,000 per year for rent and ¥100,000 for his child’s school fees. Because of the deductibles (rent and education) his taxable income is lowered to <¥700,000. He is in the 30% tax bracket and pays ~¥130,000 in taxes for the year. He takes home ¥570,000 for his wife to spend.
Now, without deducting expenses, “Dave” is now in the 35% tax bracket and his taxable income is just below ¥1,000,000. He now has to pay over ¥240,000 in taxes on top of his expenses. He takes home ¥460,000 instead of ¥570,000. His wife leaves him.
All jokes aside, like I said, this affect every foreigner benefiting from expense deductions. Someone making a comfortable ¥30,000 per month can deduct up to ¥9000 in expenses with the current system in place. That’s roughly ¥28,200 net after tax. After January 2022, this will be ~¥26,400 after tax and that’s not even taking into account the social benefits contribution.
Conclusion and what this means
Undoubtedly, a sizable number of expats are going to be on their way out of China in 2022. Both because their bottom line is lower and employers don’t have the same cost incentives to hire foreigners. Plus with the social benefit, you can expect 10% of your paycheck to be withheld without really adding any value.
That being said, it’s important to also look at the ways this could have a positive impact on foreign talents in China.
For one, less supply of foreign talent in China means more stress on demand in most situations. Some of you may remember when they made being a citizen of a native English speaking country a requirement for a work visa as an English teacher. Then, during the pandemic, only work visa holders could stay in China, and we saw an influx of teaching jobs at very high entry salaries >¥30,000/month pop up left and right. While the resulting landscape won’ be as dramatic, there is a chance something similar will happen and demand will regulate itself to the new supply.
One counter argument to this is the influx of overseas Chinese returning to China because of the pandemic. These are Chinese citizens who lived, studied and worked abroad. Many of them are fluent in English and other languages. They are well adjusted to the west and can more than adequately fill “foreigner” positions. But similar to the pandemic situation, in many cases, this influx is temporary and not sustainable. Already, the amount of people coming back to China is way less than last year and many are already planning their voyage back.
Whatever the outcome, the most important is to know what’s coming, to plan ahead, and to enjoy the rest of the year.