On May 8, 2015, the State Administration of Taxation, Ministry of Finance and China Insurance Regulatory Commission promulgated the "Notice on carrying out the pilot work concerning the individual income tax on the commercial health insurance premium" (hereinafter "the Notice", Document No. Cai Shui [2015] No. 56) to the financial departments (bureaus) and local taxation bureaus of all provinces, autonomous regions, centrally-administered municipalities, and China Insurance Regulatory Commission.

What kind of health insurance product is qualified

The commercial health insurance scheme should be approved by the provincial finance, taxation and insurance supervision departments.

What amount can be deducted

In order to further develop the commercial health insurance coverage, the following contributions can be exempted from the taxable income of individual income tax:

  • Employee's purchase on commercial health insurance not exceeding RMB2,400 per year (RMB200 per month)
  • Employer's purchase on commercial health insurance on behalf of the employees not exceeding RMB2,400 per year (RMB200 per month)

Which location can apply for the tax deduction

In accordance with the Notice, the enterprises registered on the following locations could benefit from this Notice:

  • Beijing
  • Shanghai
  • Tianjin
  • Chongqing
  • Pilot city elected by each other province and autonomous region

Who can benefit from this Notice

This policy applies to the taxpayers deriving taxable income on the following categories:

  • Employees
  • Services providers
  • Self-employed individuals
  • Personal investors
  • Partners

The Notice will encourage the general public to purchase comprehensive health insurance products by providing tax break for qualified commercial health insurance products, and also demonstrate the resolution of the SAT to reform the individual income tax regime.

From IIT perspective:

Currently, the types of allowable deductions for wage earners in China are limited. The release of Circular 56 provides some room to employers for tax effective remuneration planning.

As the insurance premiums can be deducted from the taxable income, individuals involved are able to save tax payment, following a simple calculation for tax saving:

Former: monthly taxable income 10,000 RMB IIT = (10,000 – 3,500) X 20% - 555 = 745 RMB

After purchasing the commercial health insurance product:

IIT = (10,000 – 3,500 – 200) X 20% - 555 = 705 RMB

Annual tax saving amount = (745 – 705 ) X 12 = 480 RMB

From CT perspective:

According to the prevailing CIT law, commercial insurance that a company pays for its employees is not allowed as deductible expense for CIT purposes, unless it is specifically advised by finance and tax authorities. As there is no specific clause regarding the deduction possibility for CIT purpose mentioned in Circular 56, the practice would remain unchanged.

The following points would be further confirmed before the implementation:

  • In addition to the municipalities, the pilot city should be further determined;
  • If the commercial health insurance is purchased by the individual directly, how to proceed with the deduction from their taxable income for individual income tax.
  • What documentation should be submitted to the employers for their further actions

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.