Foreign Employee's Individual Income Tax Policy Changes
1. Foreign individuals no longer enjoy tax exemptions for housing benefit, language training expense, and child education expense, and instead, will enjoy additional itemized deductions as new policy kicks in from January 1, 2022.
2. The individual income tax (IIT) calculation method for foreign individuals’ annual one-time bonus is going to change from January 1, 2022 for some taxpayers. Foreign individuals who obtain annual one-time bonuses will have to combine their annual bonuses with the yearly comprehensive income for computation and payment of IIT.
Individual Income Tax Policy Before 2022
China’s State Taxation Administration through Circular No. 164 announced preferential policies that will be applied to foreigners from 2019 to 2022. Foreigners can enjoy either special additional deductions or tax exemption from January 1, 2019, to December 31, 2021. Foreign individuals can enjoy tax exemptions for housing benefit, language training expense, child education expense, home leave expense, and laundry expense etc.
The additional itemized deductions include: child education expense, continuous education expense, medical expense for serious illness, home loan mortgage interest, rental expense and expenditure on dependent parent.
Impact on Foreign nationals
There is likely to be a significant impact on foreign employees, and companies may need to consider covering certain costs personally to ensure they remain attractive to key foreign talent. The new policy is estimated to have a particular impact on high-income foreign workers with children.