For the vast community of expatriates living and working in China, as well as business owners operating Wholly Foreign-Owned Enterprises (WFOEs), the most encouraging recent news is undoubtedly the joint announcement by the Ministry of Finance and the State Taxation Administration: The preferential Individual Income Tax (IIT) policies regarding tax-exempt allowances for foreign nationals have been officially extended to December 31, 2027.
This policy extension provides a valuable window of opportunity for foreigner tax planning in China. However, according to recent client inquiries at Hongda, while many expats are aware of the extension, significant confusion remains regarding specific execution details, WFOE tax planning, compliant profit repatriation, and how to move funds offshore after asset liquidation.
This article delves into the core details of this policy extension and further explores how foreign business owners can legally and efficiently handle dividend distribution and capital repatriation.
Personal Salary Tax Planning Between Tax-Exempt Allowances and Special Additional Deductions
The core of this policy extension is allowing eligible foreign individuals to continue enjoying specific tax-exempt allowances until the end of 2027. For high-income groups, this is a key lever for reducing the actual tax burden.
The core of this policy extension is that eligible foreign individuals may continue to enjoy specific tax-exempt allowances until the end of 2027. Alternatively, they may opt for the special additional deductions available under the individual income tax regime. Taxpayers may choose only one of these two deduction methods, and once the choice is made, it cannot be changed within the same tax year. For high-income groups, making an informed selection between these two options is a key lever for optimizing the effective tax burden.
1. Current Tax-Exempt Allowances for Foreigners
This is a special incentive for expatriates based on the core principle of "reimbursement on actual expenses." These amounts are not included in the tax base, resulting in a strong tax-saving effect. Key items include:
- Housing Rental: Requires a formal rental invoice (Fapiao) and lease contract. This is typically the largest deduction.
- Children's Education: Limited to tuition fees for children attending schools in China; requires official school invoices.
- Language Training: Fees for language training received by the expat within China.
- Meals: Reimbursement based on valid dining invoices.
- Laundry: Reimbursement based on laundry service invoices.
- Relocation: Moving expenses incurred inside or outside China upon hiring or resignation.
- Business Trip: Travel allowances that meet standard criteria.
- Home Leave: Reimbursement for transportation costs for visiting the home country (up to twice a year; tickets only, accommodation excluded).
2. Special Additional Deductions
These are standard deductions under China's new IIT law, based on the principle of "Fixed Amount Deduction." No invoices are needed, only information declaration. Items include:
- Children’s Education: RMB 2,000 per month per child.
- Continuing Education: RMB 400/month for academic degrees; RMB 3,600/year for professional qualifications.
- Major Disease Medical Treatment: Self-paid portion exceeding RMB 15,000, capped at RMB 80,000 per year.
- Housing Loan Interest: RMB 1,000 per month for first-home loans.
- Housing Rent: RMB 1,500 / 1,100 / 800 per month, depending on the city.
- Support for the Elderly: RMB 3,000 per month (for only children; shared for non-only children).
- Care for Infants under 3: RMB 2,000 per month per infant.
For a detailed introduction, you can read Hongda’s previous blog about special additional deductions.
Hongda's Expert Suggestion: For most expatriate executives, the Tax-Exempt Allowances (Option A) usually offer a greater advantage. Under this model, as long as the company establishes a compliant reimbursement system and employees provide authentic, valid Fapiao, substantial expenses—especially housing and international school fees—can be fully exempted from IIT. Given the high cost of living in Tier-1 Chinese cities, these exempted amounts often far exceed the fixed quotas of the Special Additional Deductions.
WFOE Business Owners: Tax Optimization for Dividends and Bonuses
Beyond salary, many expats are also shareholders or investors in WFOEs, focusing on investment returns. As a WFOE owner, you typically hold dual roles as "Investor" and "Executive," creating two main channels for withdrawing funds: Shareholder Dividends and Annual Bonuses. These two methods have distinct tax treatments and require precise WFOE tax planning.
1. Shareholder Dividends
The Investor’s Path Dividends are investment returns based on your shareholding in the WFOE. The defining feature is that this money comes from "post-tax profits"—meaning the company must first pay Corporate Income Tax (CIT).
Currently, expat IIT incentives regarding dividends are in a unique bonus period. Currently, dividends and bonuses obtained by foreign individuals from Foreign-Invested Enterprises (FIEs) are temporarily exempt from Individual Income Tax. This means that, as a foreign shareholder, your dividend withdrawals are currently 0% tax for the individual. This remains a significant "hidden" incentive for attracting foreign investment.
2.Annual Bonus
The Executive’s Path Unlike dividends, bonuses are paid based on your "employee" status. Commercially, bonuses are a labor cost. This means bonuses can be deducted before Corporate Income Tax (CIT), reducing the company's tax burden (saving 25% CIT), though the individual must pay IIT.
The good news is that the preferential "Annual One-Time Bonus" calculation method for foreigners has also been extended to the end of 2027. This algorithm prevents a massive bonus from being added directly to your monthly salary (which would trigger the highest tax bracket). Instead, it spreads the amount over 12 months to determine a lower applicable tax rate.
Key Calculation Formula:
- Step 1 (Find Tax Rate): Tax Rate Base = Annual One-Time Bonus Income ÷ 12
- Step 2 (Calculate Tax): Tax Payable = Annual One-Time Bonus Income × Applicable Tax Rate - Quick Deduction
In most cases, extracting profits via Dividends is the preferred choice for WFOEs. Although the company pays 25% CIT, the individual pays 0% tax, making the overall fund loss controllable and compliance risk lowest.
However, if your company has significant pre-tax profits needing cost deductions, structuring a reasonable "Annual Bonus" might be more cost-effective. By using the bonus to offset the company's 25% CIT and leveraging the "One-Time Bonus" algorithm for a lower individual tax rate, you can sometimes achieve optimal overall tax efficiency (Company + Individual).
You may Also Wonder: Repatriating Funds from Property Sales
Beyond business income, we see increasing inquiries regarding property disposal. When an expat sells a residential property in China, how can the significant proceeds be legally repatriated?
In a standard property transaction, the Seller is primarily responsible for Value-Added Tax (VAT (often exempt if the residence is held for over 2 or 5 years) and Individual Income Tax (IIT, typically 20% of the capital gain). The Buyer is responsible for the Deed Tax. To obtain the certificate, you must visit the local Tax Bureau with your Property Sales Contract and invoices immediately after the transaction. Once the Seller's taxes (VAT and IIT) are fully paid, the bureau will issue the Tax Recordal Form for Service Trade and Other Items (Tax Clearance Certificate).
When processing such large foreign exchange transactions, banks will strictly review the Property Sales Contract, property transfer registration, and tax payment proofs. Only by proving the funds are legitimate, tax-paid property proceeds will the bank approve the conversion to foreign currency and remittance to an overseas account under the same name. It is recommended to apply for a one-time remittance after the transaction to simplify the compliance review.
Conclusion
The extension of the IIT incentives to 2027 offers a valuable buffer for expats in China, but the complexity of tax compliance and cross-border fund movement remains high. Whether optimizing salary structures, planning WFOE dividend distribution, or handling property proceeds, precise policy understanding and professional execution are required.
Hongda is dedicated to helping foreign investors and business owners navigate China's complex regulatory environment. If you need to assess your tax status or plan for capital repatriation, please contact our professional team today.
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