IIT Reform - Expat Allowances and Annual Bonus

Caishui [2018] No. 164 (“Circular 164”) jointly issued by MOF and SAT on 27 December 2018 clarify the application of tax exempt allowances for foreigners and special rules regarding annual bonus after the IIT reform:

1. Tax exempt allowances/benefits

As of 1 January 2019 to 31 December 2021, foreign nationals who qualify as PRC tax residents may choose to either enjoy specific additional deductions if applicable (i.e., children education, continued education, etc.) or the existing tax-exempt benefits (including subsidies of housing, language training and children’s education). However, it’s not possible to apply both. An overseas national may select either specific additional deductions or tax-exempt benefits; and it cannot be changed during the year. As of 1 January 2022, the previous tax-exempt benefits are no longer available to foreign nationals.

2. Annual bonus

The preferential tax treatment for the annual bonus in compliance with Guo Shui Fa [2005] no. 9 is still available until December 31, 2021. Employees may enjoy the preferential tax calculation dividing the annual bonus by 12 and determining the applicable tax rates, instead of including the bonus amount into the consolidated income. However, alternatively, it is possible to choose including the bonus into the consolidated income. As of 1 January 2022 employees receiving an annual bonus must include the respective amount into the annual consolidated income and calculate the personal income tax accordingly.

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