Expats in China are subject to China Income Tax / Individual Income Tax (IIT), much like in any other country. The taxation rules, levels, and deductions differ depending on the source of income, working location, and the individual’s total working period in China. One thing that applies to all working foreigners, however, is the application of tax-free benefits as part of a total salary package.
This article will look at:
- What are tax-free benefits?
The allowable areas that are tax-free – housing, meals and laundry expenses, travel costs, family education, and relocation fee
How companies can structure a salary package for foreigners.
- The importance of providing Fapiao for benefit calculation.
For more information on IIT levels, deductions, and calculation rules, see out separate articles.
China Income tax and non-taxable benefits – the rules
The payment of tax in any country is inevitable! As too are rules, deductions, and allowances to go along with this. All foreigners working in China are taxed on their salary with so-called Individual Income Tax, controlled by the Individual Income Tax Law. This is paid on all salary, bonus, and expatriate or cost of living payments. Whether or not this applies to just income derived in China or globally depends on individual circumstances (see our separate article on IIT).
There are however a number of benefits that can be paid to employees and not subject to IIT. These non-taxable benefits also referred to as fringe benefits, are strictly defined by government regulations. They have been in place since the early 1990s but have in recent years (most recently in 2016) been tightened up and more strictly controlled.
The allowed taxable benefits
The following are defined by the Individual Income Tax Law as allowable tax-free benefits:
Housing, meals, and laundry costs. Provision for reasonable rental and living costs is allowed (appropriateness would normally be assessed based on other similar expat costs and market averages). Note too that initial relocations expense are tax-exempt, but not ongoing relocation payments beyond this.
Travel costs. Generally, up to two trips per year to the employee’s home country are tax exempt. This only applies to the employee and not for family members. In some cases, additional travel allowances may be allowed.
- Family education and language training. For accompanying spouse and children, the provision of Chinese language training and children’s education is permitted.
The importance of Fapiao and other things to be aware of
The calculation and collection of IIT, and with it the allowable benefits, is taken very seriously in China. There are strict controls, regular audits, and strong penalties for incorrect treatment. As mentioned, the laws regarding this have been tightened in recent years.
The main requirement for all non-taxable benefits is that “Fapiao” (invoices) must be supplied for all costs, and these must be deemed to be appropriate. Anything in excess of this will be subject to IIT. In addition in some regions (including Shanghai) it is necessary for all tax benefits to be detailed as part of monthly IIT returns.
Both companies and employees should be aware of these requirements for official Fapiao. The Fapiao system in China is complex, and many transactions do not fully follow the system. This can be important with some purchases or contracts (for example property rental) where a request for official Fapiao to be provided may change the price paid.
Specific audits (separate from other tax and IIT audits) may also be carried out for fringe benefits. In such cases, authorities would want to check Fapiao is provided and genuine, the expense qualifies as non-taxable, and it is within the range of “reasonable” for that employee and expense type.
Structuring a salary package for foreigners
The inclusion, and tax treatment, of benefits, is an important consideration in the package offered to foreign employees. Clearly offering some of these as non-taxable benefits can be advantageous to employees as it avoids IIT. But the company, of course, must consider what it is prepared to offer.
The question of how much of a salary package can be allocated to these allowances sometimes comes up. This is not strictly defined in Chinese law, it is simply stated that amounts should be “reasonable.” This is more to do with market averages for costs rather than the proportion of total pay. Nevertheless, from experience, most companies would not set allowance rates higher than around 25/30% of the total package. Note also that this assessment of “reasonable” market average is becoming easier to control as local authorities increasingly require the data of full breakdown of benefits to be provided as part of tax returns.
It should also be noted that any such benefits to be paid, including bonus, should be specified in the employment contract. Doing so means they can be paid and taxed as appropriate, but also that the company is legally bound to offer them. If there is any doubt about inclusion or the level of payment, it should be sorted before defining it in the contract!
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