At its last meeting of 2021 the State Council brought good news for all taxpayers.
Some of the preferential policies applying to Individual Income Tax (“IIT”), which were due to be retired on December 31 2021, were renewed and their validity extended.
I. Announcement N°42
Following the State Council Meeting held on 29 December 2021, the State Taxation Administration (“STA“) issued an official Announcement on 31 December titled( Announcement No. 42 (“Announcement No. 42“).
According to Announcement No. 42, the details of the renewals are as follows:
1. The implementation period for the policy allowing separate taxation of Annual Lump Sum Bonus under Cai Shui  No. 164 (“Circular No.164”) is extended to 31 December 2023;
2. The implementation period for the policy allowing separate taxation of equity incentives for listed companies under Circular No.164 is extended to 31 December 2022;
3. The implementation period for the policy allowing the exemption from the tax remittance on Consolidated Income Items regulated under STA Announcement  No. 94 (“Announcement No. 94”) has been extended to 31 December 2023.
Notes from DaWo
The first policy extension is certainly the one that affects most tax-payers. In 2018 the state revised and issued the “New IIT Law” which became effective as from 2019. However, at the same time the STA also issued some policy measures which aimed to allow a smooth transition from the “old” to the “new” law. Such measures included Circular No. 164, which stipulates that during a three-year “transitional period” from 2019 to 2021, taxpayers can choose to apply the old policy (separate taxation) or the new policy (consolidated taxation) on some benefits they enjoy in addition to their monthly salary, such as the Annual Lump Sum Bonus they receive.
The renewal in Announcement No. 42 provides for an extension of the transitional period of some policies under Circular No.164. As a consequence for the next two calendar years, taxpayers will still have the right to choose to have their annual bonus taxed separately or rather to consolidate their bonus with their other “consolidated income” and have this total consolidated income taxed aggregately. The same will apply to certain equity incentives received from a listed company, it being specified however, that this policy is extended only until the end of 2022.
As for the third policy, it applies to taxpayers who should pay additional IIT on their consolidated annual income. The policy extends the exemption of payment of such additional IIT until December 31, 2023, provided their annual consolidated income does not exceed RMB 120,000 or if the additional IIT does not exceed RMB 400.
II. Announcement N°43
On 31 December 2021 the STA issued another announcement (Announcement  No. 43, “Announcement No. 43“), which extended the validity of two other preferential policies on IIT:
1. The implementation period of the preferential policy on allowances and subsidies for foreign individuals which was stipulated in Circular No.164, is extended to 31 December 2023;
2. The implementation period of the preferential policy on separate taxation of the incentives for persons in charge of state-owned enterprises which was stipulated in Circular No.164, is extended to 31 December 2023.
Notes from DaWo
The extension of the preferential policy applying to foreign taxpayers had been subject to intense speculation from the foreign business communities across China for several months. Indeed it was expected that the end of the preferential policy would cause either a substantial increase on the overall cost of foreign employees on the companies employing them or a considerable reduction of the net income of those foreign employees, depending on which side would carry the burden of the additional taxation caused by the expiration of the preferential policy. Either way it was expected that the situation was liable to negatively affect in particular foreign invested businesses in China.
The original Circular No.164 provided that during the three-year transition period (from 2019-2021), foreign taxpayers could either choose to continue to apply the full tax exemption policy for certain costs or expenses they actually undertake and for which they receive a subsidy or allowance as part of their “salary package” paid by their employers, or alternatively, opt to apply the new policy which provides for fixed-amount deductions (capped) for certain specific costs which all employees in China (foreign or Chinese nationals) can apply for. Please refer to our previous article on this subject for more details.
Announcement No. 43 has now extended the transitional period which means that foreign taxpayers can continue to enjoy the full exemption calculation on the actual amount spent, for instance on house rent or children schooling fees, for another two calendar years.
This should leave sufficient time for employers of foreign nationals and for foreign employees to start planning ahead and prepare for the new policy to apply.
Indeed it should be remembered that the preferential measure maintains in effect an unequal treatment between tax payers depending on their nationality which is a largely unusual situation. Although it is obviously impossible to foresee how fiscal policies will evolve over time, it seems reasonable to expect that this unequal treatment will eventually come to an end. For now at least it is planned to end on December 31, 2023.
If you have any questions in this respect please feel free to contact us.