Relief the Individual Income Tax burden of taxpayer in China: extending the preferential policy period or increasing the deduction standards
In August 2023, there are a number of individual income tax (IIT) preferential policies implemented by relevant Chinese government authorities with either extension of the preferential policy period or increased deduction standards. The aim is to further relief the tax burden of taxpayer.
Extended period for some individual income tax preferential policies
On August 18, 2023, the Ministry of Finance and the State Administration of Taxation have decided to continue the implementation of some IIT preferential policies as follows:
- Foreign individuals that satisfy the conditions of resident, may select to enjoy the special additional deductions for IIT or IIT exemptions on allowances for foreign individuals (e.g. language training fees, housing allowances, children’s tuition fees etc.), but cannot enjoy both policies simultaneously. Once selected, the method cannot be changed within one fiscal year. The announcement will be implemented until December 31, 2027.
- One-off annual bonus for individual tax residents will not be consolidated into the comprehensive income and can be calculated by dividing the one-off annual bonus into 12 months to apply the corresponding monthly IIT rate and quick deduction. The said preferential policy would be extended to December 31, 2027.
- The share incentives (including stock options, stock appreciation rights, restricted stocks and equity awards etc.) obtained from listed companies by individual tax residents will not be consolidated into the comprehensive income and can be calculated independently by applying the corresponding comprehensive IIT rate and quick deduction. The said preferential policy is extended to December 31, 2027.
Deduction standards of certain special additional deductions for individual income tax are increased
On August 31, 2023, the State Council of the People's Republic of China has decided to increase the deduction standards of three special additional deductions, including:
- The special additional deduction standard for the care of infants under 3 years old will be increased from CNY 1,000 per month to CNY 2,000 per infant.
- The special additional deduction standard for children's education has been increased from CNY 1,000 per month to CNY 2,000 per child.
- The special additional deduction standard for supporting the elderly has been increased from CNY 2,000 to CNY 3,000 per month. Among them, the only child may deduct CNY 3,000 per month; the non-single child and siblings that share the monthly deduction amount of CNY 3,000, may deduct the allocated amount not exceeding CNY 1,500 per month per person.
The abovementioned adjusted deduction standards will be implemented from January 1, 2023.
Garrigues tax insights
In light of the expansion for four further years for some individual income tax preferential policies, it would be worth to review any transitional agreements or tax equalization schemes that might have been entered into transitionally between employers and employees when it was expected that the tax benefits could be abolished, so as to see how to align the tax position and common interests between both parties to achieve the maximum net salary within the legal framework and make sure the formalities and compliance requirements for the lawful enjoyment of the tax benefits are met.