Key Takeaways
- Historically, China has had a separate income tax policy for citizens and expats.
- Expats are entitled to a range of fringe benefits that reduce their income tax burden in China.
- With this preferential policy set to come to an end, it is crucial that expats in China seek expert advice on their individual income tax obligations going forward.
Historically, China has allowed expatriate employees to lower their tax burden by claiming a portion of their salary as tax-exempt allowances. After deliberation from the State Taxation Administration (STA), the policy on non-taxable benefits has been extended, Ending on 31 December 2027.
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What Is the Individual Income Tax (IIT) Preferential Policy for Fringe Benefits?
According to China’s Individual Income Tax (IIT) law, expatriates who qualify as tax residents are required to pay income tax on all their China sourced income. However, the State Administration on Taxation and Ministry of Finance implemented a policy, beginning in January of 2019, which provided certain fringe benefits for foreign tax residents in China.
According to Cai Shui (2018) No. 164, from 1 January 2019, foreign tax residents were entitled to some of the following tax-free fringe benefits:
These benefits could be exempt from taxes, provided that the expenses were reasonable, and they were accompanied by the relevant supporting documentation such as the fapiao, for each expense claimed. In principle there is no set amount that can be deducted, however Chinese law states that a reasonable amount may be deducted. In general, it is advisable that between 30% and 35% can be deducted from a foreign employee’s monthly salary, in order to avoid any inquiries from the tax bureau.
The Transition Period
With the implementation of China’s Individual Income Tax Law, the government intended to reduce the benefits received by foreign employees working in China and create an equal taxation system on foreigner and local taxpayers. Instead of an immediate implementation of this, the transition period was announced in Cai Shui (2018) No. 164 – which applied from 1 January 2019.
The IIT law and subsequent notice, Cai Shui (2018) No. 164, applied to foreign employees who reside in China. During the transition period, foreign tax residents have the option of choosing either:
1. The Additional Itemized Deductions
Which allows for deductions on these six items:
- Children’s education costs
- Further education costs
- Housing mortgage interest
- Housing rental expense
- Healthcare expenses for serious illness
- Costs for taking care of the elderly
2. The Tax-exempt Benefits
As mentioned above:
- Housing rental
- Children’s education expenses
- Language training expenses
- Home-leave flights
- Meal and Laundry expenses
- Relocation expenses
This transition period has been extended multiple times, and is now due to end on 31 December 2027. After this point, expats will only be eligible for the itemized deductions.
Comparison – Itemized Deductions vs Tax-Exempt Benefits (Expats)
| Category | Itemized Deductions (Post-2027) | Tax-Exempt Benefits (Until 2027) |
|---|---|---|
| Housing | Rent deduction limit based on city tier | Tax-free reimbursement of actual rent with fapiao |
| Children | Standard education deduction | Tax-free reimbursement of tuition fees |
| Language Training | Not deductible | Tax-free if job-related |
| Flights | Not deductible | Tax-free home-leave flights |
| Meals / Laundry | Not deductible | Tax-free with company policy |
| Relocation | Limited deduction | Fully tax-free with invoices |
What Other Tax Benefits Apply to Expats in China?
As a general rule, you will be considered a resident individual in China, if you meet either of the following conditions:
- You have a domicile in China; or
- The duration of your residence in China exceeds 183 days in a tax year.
If you are considered a resident, you will be required to pay taxes on your global income. If you are not considered a tax resident, you will only be required to pay taxes on your China-sourced income.
There is a general exemption for expats in China known as the 6-year rule, meaning that expats who have been in the country for less than 6 years are not liable to pay income tax on their non-China income.
The scope of taxation covers salaries, wages, any labor remuneration as well as any other income sources. The starting point for individual income tax to be applied is RMB 5,000.
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China’s preferential individual income tax policies for foreign expatriates—including housing and meal allowance exemptions, and specific relief programs in high-talent-demand cities like Beijing and Shanghai—can reduce effective tax rates by 20-30% compared to standard taxation. Claiming these benefits requires proper documentation, housing lease evidence, and employer filing. MSA Asia secures your expatriate tax relief. Speak with our advisors for China tax advisory.