Employee reimbursement is a frequent financial management activity within companies. However, the tax compliance of these reimbursements is often overlooked, which can lead to tax risks. This article will provide a detailed analysis of the key points for tax compliance and risk prevention in employee reimbursement.

I. Corporate Income Tax Treatment

When deducting employee reimbursement expenses from corporate income tax, it is essential to strictly distinguish the nature of the expenses to ensure compliance with tax regulations.

1. Travel Expenses: Travel expenses are considered reasonable expenditures related to the company's production and operations and can be deducted from corporate income tax. However, it is important to note that reimbursement for travel expenses must be accompanied by detailed travel approval forms, invoices, and other supporting documents to prove the authenticity and reasonableness of the expenses. The deduction of travel expenses should also comply with the company's internal travel expense management system and not exceed the standards set by the local tax authorities.

2. Business Entertainment Expenses: Business entertainment expenses can be deducted at 60% of the actual amount incurred, but the maximum deduction cannot exceed 5‰ of the company's annual sales (operating) revenue. The deduction of business entertainment expenses must strictly distinguish activities related to customer business dealings to avoid mixing in non-business entertainment expenses.

3. Employee Welfare Expenses: Up to 14% of the total payroll can be deducted for employee welfare expenses. For example, if an employee's reimbursement for round-trip travel expenses during family visitation leave is within the company's welfare policy and within the limit, it can be deducted as employee welfare expenses. The deduction of employee welfare expenses must be supported by a clear welfare policy document.

II. Value-Added Tax (VAT) Treatment

If the expenses in employee reimbursement involve VAT special invoices and the invoices are compliant, the input VAT can be offset.

1. Transportation Expenses: Transportation expenses incurred during employee business trips, such as air tickets and train tickets, can be offset against input VAT. The input VAT offset rate for air tickets and train tickets is 9%, and the tickets must include the travellers' identity information.

2. Personal Consumption by Employees: Personal consumption by employees cannot be offset against input VAT. For example,      reimbursement for personal travel expenses, such as family visitation flights, is considered personal consumption and cannot be offset against input VAT.

 3. Deemed Sales: When a company gives gifts to customers in the company's name, although it is considered personal consumption, it must be treated as a deemed sale subject to VAT. In this case, the input VAT can be offset. When a company gives gifts to customers, it must retain relevant gift contracts or agreements to prove the commercial purpose.

III. Personal Income Tax Treatment

If employee reimbursement expenses are related to employment or service, they are generally included in the salary and wages income and are subject to withholding tax under the "salary and wages income" category.

1. Travel Expenses: Travel expense reimbursements usually do not involve personal income tax. However, if the travel allowance exceeds the specified standard, the excess amount must be included in the salary and wages income for personal income tax calculation. The tax-exempt standard for travel allowances must be based on the specific regulations of the local tax authorities.

2. Communication Expenses: Communication expenses reimbursed by the company to employees can be excluded from salary and wages income if they meet the standards set by the local tax authorities. The tax-exempt standard for communication expenses must be based on the specific regulations of the local tax authorities.

3. Welfare Expenses: Reimbursements for welfare expenses, such as round-trip travel expenses during family visitation leave, can be treated as employee welfare expenses if they comply with the company's welfare policy and are within the limits set by tax law. However, they must be included in the salary and wages income for personal income tax calculation. The personal income tax treatment of welfare expenses should be determined based on the nature and amount of the specific expenses, and it is recommended to consult tax professionals.

Employee reimbursement involves multiple tax types, with high and complex compliance requirements. Companies need to establish and improve internal control mechanisms from various aspects, such as invoice management, expense aggregation, and tax treatment, to ensure the compliance of the reimbursement process. At the same time, companies should strengthen employee training to enhance their awareness of tax compliance, thereby effectively reducing tax risks and ensuring the stable operation of the company.

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.  

PHC Advisory is a company of  DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

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