Foreign workers in China take note! There are changes to individual income tax (IIT) that have come into being in January 2022, and they're not going to be welcome.
TL:DR: you're probably going to have less take-home pay than in 2021 unless you renegotiate higher gross salaries with your employers.
I'll give an overview of the changes here.
What has changed in terms of IIT for foreigners?
There are a few changes to individual income tax and benefits payments to be aware of:
- The social benefits contribution (pension fund and health insurance) is now mandatory for foreign workers, not optional.
- The deduction of expenses from total taxable incomewill change next year.
- The annual one-time bonus calculation for tax residents (including foreign staff)will change next year.
You can probably guess that these changes are likely to have an adverse effect on take-home pay, but to what extent? Let's explore each change...
1. Change to the social benefits contribution
The social benefits that foreign workers will now have to contribute to from their pay are healthcare insurance and pension fund (Chinese staff also pay into the housing fund, but this is not applicable to foreigners). This change came in Q3 2021, and it's being enforced with punishments for non-compliance for companies and individuals from the tax authorities.
The cost of these two things come out of the worker's gross salary at source and are, roughly:
- Pension fund = 8%
- Healthcare insurance = 2%
Is there a benefit to paying this?
No one wants to 'lose' 10% of their gross salary, however by paying these benefits you're saving for a pension and are entitled to treatment at Chinese hospitals. The healthcare insurance payments are loaded onto a type of card, looking like a debit card, that is issued to you and can be used to subsidize the cost of treatment and medicines at clinics and hospitals. This will provide you with reduced or even free healthcare costs depending on the medication or treatment required.
It goes without saying that saving for a pension makes good fiscal sense.
What if you leave China?
Let's say you finish your employment in China and you head home. Do you lose the social benefits contributions you've been making? No, you don't.
You should apply to claim your pension fund payments and healthcare insurance* back and these will payed as a lump sum to you.
*If you have used some of the healthcare insurance money by purchasing treatment or medication, that money is not returned.
How do I claim back my social benefit contributions?
If you're leaving China, here's some guidance on how to claim back your contributions (source):
According to the regulations, foreign insured employees of Shenzhen enterprises can refund their social security when they leave China. They only need to carry the specified materials to the social security institution of the unit, or to Shenzhen Futian Social Security Bureau.
The following materials shall be provided for withdrawing social insurance: written application, resignation certificate, personal valid passport, Shenzhen employee social insurance certificate / Shenzhen labor security card / social security card and bank card.
2. Change to deducting expenses
Up to December 2023, China tax residents were allowed to deduct up to 30% of their gross salary as 'expenses.'
Expenses could include costs like:
- Housing expenses, like rent
- Children's education costs
- Meals at work
- Business travel
- Flights home per year for family visits
- Laundry costs
- Language lessons
- Relocation costs in the event of moving for work
The worker needs to retain fapiaos (invoices) for these kinds of costs and the expense could be deducted from their taxable income.
These preferential tax-exemption policies for deductions like this were placed on notice by the government on January 1st, 2019. The government has notified on December 31, 2021 that the policy will be extended to December 31, 2023.
Why this cold be a big problem (example)...
Many foreign staff are on relatively high salaries, so a 30% deduction in taxable income resulted in fairly sizable tax deductions and more take-home pay.
Without the ability to reduce gross income, many foreigners could be tipped over into a higher tax bracket, being hit with a double-whammy:
- Losing the expenses
- Paying a higher percentage in tax
Say you have a gross income of 750,000 RMB per year, that should place you in the 35% tax bracket at around 60k/month. However, deducting 30% for expenses actually places you in the 30% tax bracket with an income of 525,000 RMB or around 40k/month. Without that deduction, in 2024 onwards you're going to be in the higher tax bracket.
You can refer to this table to see the different tax brackets and how you might be affected.
Some sources are saying that this could lead to an exodus of foreign workers who see their paypackets slashed. That remains to be seen. It may be that employers can come up with some creative ways to improve their staff's financial prospects despite this rule change.
3. Change to how the annual one-time bonus is calculated
In short, from January 2024 all annual one-time bonuses must be combined with taxable annual income and be calculated for IIT as one combined total gross income.
This, again, could lead to higher tax payments. Here's why...
Why this could lead to a heavier tax burden (example)
Before January 1st 2024, staff receiving an annual one-time bonus could choose to calculate IIT on their bonus separately from their gross income.
In practice, this meant that the tax bracket applied to your annual bonus might be lower than that your gross income falls into:
Let's say that you earn a gross salary of 600,000 RMB and this puts you into the 30% tax bracket. Until December 2023, if you received an annual bonus of 75,000 RMB this would be taxed at just 10% (divided by 12 it comes to 6,250 RMB which according to the brackets is at 10%).
From Jan 2024, the 75000 RMB annual bonus is added to your gross income of 600,000 RMB taking your total gross income for the year to 675,000 RMB which places you into the 35% tax bracket.
As you can imagine, your tax burden is increased as you're not only paying more tax on your bonus but on your entire income, reducing your take-home pay from 2022's level.
Again, one way around this could be to examine your contract with HR and accounting and see if there is any way to tweak your payments to keep you under a new tax bracket's threshold.
Conclusion
You will be losing around 10% gross salary at source to pay for the social benefits of healthcare insurance and your pension fund (the latter being, at worst, a nice nest egg to leave China with if you go home).
From Jan 2024, You could be paying more tax and, simultaneously losing around 30% in expense deductions.
You could also be paying more tax and losing more of your annual bonus than before.
It isn't all doom and gloom, though. Your company's accountants may be able to make changes to your contract to help you avoid some of the most damaging effects of these changes to Individual Income Taxation, such as ending up in a higher tax bracket.
If you're running a company in China and want to get some accounting advice to help navigate these changes, we can help! Just hit this link, or the button below, to get a free consultation from our China accounting team where we'll aim to give you advice on saving taxes, streamlining your affairs, and becoming more compliant.
