ISSUING AUTHORITY:

State Administration of Taxation

DATE OF ISSUANCE:

December 27, 2018

EFFECTIVE DATE:

Ceases to be effective on December 31, 2021

Historically foreign nationals living in China have been able to enjoy tax exemption policies on a number of employment benefits such as housing, education and language training. In 2018 the State Administration of Taxation and the Ministry of Finance jointly issued a Notice (Cai Shui [2018] No. 164) which extended these benefits until the end of 2021. From January 1, 2022, these tax exemption policies will be replaced by a series of itemised deductions. The distinction between the two policies is that the tax exemption policies placed no formal limit on these expenses whilst the itemised deductions contain limitations. For example, an overseas employee with a child in an international school charging fees of USD40,000 could potentially claim the entire school fee as tax exempt whereas under the new itemised deduction policy only RMB1000 per month per child may be deducted.

The largest expenses for most expat families living in Shanghai are rent and schooling. The removal of the tax exemption for these two forms of expenses and the introduction of a far less generous itemised deduction regime will cause a significant change in their disposable income. Any companies employing foreign nationals will need to make the decision of whether to gross up their employees salary to take account of the extra tax that will need to be paid on these expenses or risk the possibility the employee will choose to move out of China.

There has been much discussion of the negative effect that this change will have on foreign nationals and especially the ability of foreign companies to retain their senior staff. It has also been suggested that in light of the problems currently being faced by companies as a result of the COVID-19 pandemic that the existing tax exemptions should be extended temporarily. However, at the time of writing no indication of an extension has been forthcoming. (ADDENDUM On the 31st December 2021 the Ministry of Finance issued Announcement 43 wherein they extended the tax exemption policy contained within Cai Shui [2018] No. 164 until the end of 2023)

See article 7:

http://www.chinatax.gov.cn/n810341/n810755/c3978994/content.html