China Prolongs Certain Individual Income Tax Incentives for 2 years

An executive meeting of the State Council held on December 29th took place in which an important decision was announced stating the prolongation of applying several preferential individual income tax (IIT) policies.

In order to reduce the burden of individual income tax and relieve the pressure for low- and middle-income taxpayers’ categories, State Council executive meeting decided that:

1. The policy of an annual one-off bonus to not be incorporated into the comprehensive income for tax calculation purposes and the implementation of separate taxation policy for an annual bonus will be extended until the end of 2023.

The calculation formula for an annual bonus is:

Tax payable = annual one-time bonus amount * applicable tax rate - quick deduction

2. Supplementary individual income taxes that must be paid when completing the annual IIT filing can be exempt for the amount not exceeding RMB 400. This policy is also applicable for those whose annual income does not exceed RMB 120,000, and it will be extended until the end of 2023.

3. Preferential tax policies are extended for equity-based incentives of listed companies until the end of 2022.

The abovementioned three policies are expected to reduce taxes by RMB 110 billion a year. This regulation update comes at a crucial time, especially for foreign employees in China, as the preferential IIT policy in relation to certain tax-exempt items expires at the end of 2021. Separate treatment of an annual bonus can reduce the overall tax burden businesses and individuals are going to face from 2022 onwards.

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