China – Annual individual income tax filing and what expatriate should consider

published on 5 January 2021 | reading time approx. 3 minutes

With the beginning of a new year, it is time to get prepared for the 2020 annual individual income tax ("IIT") filing again. Obviously the Covid-19 pandemic has changed many foreign expatriates' working status in China, we hereby summarize the most important issues which might be helpful to proceed the annual IIT filing in this year.

• Are the IIT-exempted benefits for foreign expatriates in China still valid this year?

  Currently the IIT-exempted benefit items, which include allowances for housing, meal, laundry, children’s education, homeward journey, relocation and Chinese language training , are still valid for foreign expatiates who are IIT liable for salary income in China. The declaration of IIT-exempted benefits could be made by the Chinese employers of foreign expatriates during the monthly IIT withholding process. If there exist IIT-exempted benefits that are not fully considered during the monthly declarations, foreign expatriates could still retroactively declare them during the annual IIT filing. In practice tax authorities may request the taxpayers to present supporting documents of the IIT-exempted benefits declared during the annual filing, therefore it is recommended that both employer and foreign employees should well keep the full package of supporting documents, including but not limited to company policy, employment contracts, contracts for rental and schooling fee, invoices, expense reimbursement forms, etc.

• Are there any news updates regarding the valid period of IIT-exempted benefits?

  It is officially announced that the IIT-exempted benefit items for foreign expatriates in China will be no longer valid since 1 January 2022. However, it is so far not clear whether any replacement policy will be released to provide equivalent tax relief for foreign expatriates. If there are any new developments, we will keep you updated. 

• What if the IIT calculation method needs to be switched between resident and non-resident taxpayers?

  Annual IIT filing is a good opportunity for foreign employees to make adjustments on the monthly filings made by their employers, including switching the calculation method between resident and non-resident taxpayers. But such a change is not always perfectly smooth in practice. When the monthly IIT filings are made as non-resident taxpayers, it is usually easy to switch to the one for resident taxpayers via the annual reconciliation system which is in theory only applicable for resident taxpayers. Nevertheless, a change in the opposite way may lead to difficulties, due to the lack of a reconciliation system for non-resident taxpayers. Therefore, it could be considered to make the monthly IIT calculation based on non-resident assumption, if the residing days for foreign employees in China cannot be estimated accurately, i.e., more or less than 183 days in a calendar year, which is set as a criterion for tax residency assessment for most foreign expatriates. Please note such assumption is not suitable for expatriates who work in China on project basis with a foreign employment contract, where the assessment may be even more complicated and needs to be analyzed case by case.

• Is the IIT preferential calculation method for the annual bonus still valid?

  For the annual bonus that is paid out during the calendar year 2020, the IIT preferential calculation method is still valid for both resident and non-resident taxpayers. The preferential method for non-resident taxpayers has not been set with a restricted valid period. While it is officially announced that the annual bonus preferential treatment for resident taxpayers will be no longer valid since 1 January 2022, which means any bonus to be paid out to a resident taxpayer in 2022, even if it is related to the employee’s performance of 2021, will not be applicable to the prevailing preferential method, but should be treated as a part of regular salary income for taxation. This would lead to significant impact on tax burden of resident taxpayers including Chinese citizens and resident foreign expatriates. If no replacement policy would be granted, the IIT burden of most resident taxpayers would become even higher than that prior to the IIT law reform in China since 2019. We therefore would closely watch the development status and any update regulation in the financial year 2021. 

  
 It is worth to note that due to the travel restriction set by Chinese government in 2020, many foreign employees were blocked outside China but had to work under a Chinese employment contract with Chinese salary payments. The Chinese employer of those expatriates have to continuing declare and settle Chinese IIT for the salaries they paid out on withholding basis, while from German tax perspective, those (German) expatriates are also obliged to declare income tax in Germany after 183 days are reached in most cases. You can find more information about this in our article "Travel restrictions in China – Tax risks for foreign expatriates".
   
Recently, we have been in contact with Shanghai tax authority and German tax authority as a follow up for such double taxation status of certain foreign expatriates, unfortunately there is so far no solution for such situation to avoid double taxation in China and Germany. Therefore, expatriates under such employment arrangement could make an upfront travelling plan with consideration of possible travelling restriction that might come up in 2021, and make possible adjustments in terms of employment and work arrangement where necessary, in order to avoid such double taxation situation in 2021.