As of January 1, 2019 the ‘Individual Income Tax ( IIT) Special Deduction Procedure is effective. This so called Trial Implementation regarding special additional tax deduction was already mentioned in one of our previous articles.
During the transition period (2019-2021) expatriates can still (if certain conditions are reached) apply for tax-exempted allowances under the previous tax exemption policy or apply for the IIT special deductions. Switching between both policies in one calendar year is not allowed.
As of January 1, 2022 the previous tax-exempted policy will be replaced by the six special deductions, creating a more equal basis (for both foreign and non-foreign personnel) and unfortunately a much lower level of deducting.
The IIT special deductions are related to:
- Children’s education
- Continuing education
- Medical expenses for serious diseases
- Housing mortgage interest
- House rent
- Elderly care expenses
The impact
The cancellation of these tax-exempted allowances will effect foreign businesses and expatriates. The tax burden on for example children’s education will nearly double, causing human resource costs for companies to raise. On the other hand for expatriates their assignment may be financially uncertain if they have to bear a much higher tax burden.
As a result it is expected that the cost of living of expatriates will be effected, which might have consequences for foreign investment in China as a whole.
In a survey that the European Chamber’s of Commerce in China has held with its largest member companies, the majority of respondents stated that they expect to cut a further 25% or more of their foreign personnel. Furthermore, approximately 42% of the companies stated that this termination would result in moving future investments outside of China and look for alternatives in other regional hubs like Singapore.
Companies are advised to analyze what the impact of this policy change will be for their company as a whole and for their employees. They need to transparently communicate with their employees and revise employment contracts if necessary (for example: how to deal with a possible salary cut).
DaWo Law Firm is committed to provide efficient tax compliance solutions and keep you updated regarding the latest developments. If you want to know more about the impact of the abovementioned regulation, please feel free to contact us.
