China: Tax changes for expats in China in 2022

By the end of December 31st, 2021, expatriates' tax-exempt benefits will expire, which will have an incredible effect on their taxable income in China and probably on their monthly expenditures. These changes are part of China's policy of treating everyone the same when it comes to taxes.

However, the expatriate's fringe benefits like housing and children's education will be significantly reduced, making expats deal with China's notoriously high rents and tuitions, especially in the first-tier cities. For that reason, LehmanBrown will be looking at the tax situation in China and the Pearl Delta, as it has tax benefits while comparing an expat's tax in 2021 to that in  2022 with the changes. Specifically, four different tax profiles will be considered, representing the common tiers of expatriate salaries in the marketplace, along with potential fringe benefits they may enjoy.

The hope is to spread awareness and offer potential solutions which expatriates and companies could consider to dampen the economic blow and maintain, if possible, the current living arrangements.

The fringe benefits

As of January 2022, the fringe benefits that expats could have enjoyed will end, which will not affect expats who do not enjoy them but could have a detrimental effect on expats with high school tuition fees and rent, which until now were tax-deductible and therefore exempt if part of their remuneration packages. However, these benefits would need to match the figures of the benefits package offered by the company, some benefits like housing and yearly travel home had to be specified. In contrast, meals and laundry could be interchangeable if it was lower or matched the total allowance provided. The benefits which will change significantly are as follows:

Housing allowance

The yearly rent of the house was tax-deductible in full with the presentation of the fapiao (official receipt) to prove the payment. In 2022 this is no longer possible as the rent can only deduct 18,000 RMB every year.

Daily allowance

Meals and laundry were also tax-deductible depending on the agreed package. Expats would have to bring fapiaos from their meals and dry cleaning in the company's name to make sure to reach the allotted allowance. As of 2022, these will not be deductible anymore.

Yearly travel

Travelling home and back was tax deductible and refundable as long as the trip met the terms of the benefits and were round trips from China to anywhere else in the world where the expat was considered originally resident. The assumption is at the moment that this benefit will be removed in 2022, but there might be a possibility this benefit will still be possible.

Language courses & education expenses

To help expats integrate and improve their skills, language courses or certifications done by expats in China were tax-deductible in full. The deduction did not include expats who study from China with institutions not located in China. As of 2022, this has been capped to 4,800 RMB a year.

Children's education

One of the biggest benefits for expats was deducting child education fees as the costs for international education was expensive and a deterrent for highly talented expats to move to China. With the benefits, expats could have the full school fees as tax-exempt as long as they were part of the package. To put in perspective, these are on average 204,000 RMB per annum. Next year this single benefit will result in the biggest increase of tax for expats, as Child education will be capped annually at 12,000 RMB. In other words, a family with two children would have an additional taxable income of 384,000 RMB.

Elderly support

However, a new deductible will be added in 2022, but it is more in line with relieving the families of the burden of taking care of their elderly parents. If expats take care of a family member above 60 years old, they could acquire 24,000 RMB as an annual tax-deductible.

Tax effects across China in practice

To see the effects of the changes, four tiers of expats have been calculated representing the Young & Senior professionals (Tier 4 & Tier 3), Directors or Managers (Tier 2) and Executives (Tier 1). Each will have different benefits to match the market and better show the impacts of these changes.

Example Tier 4 breakdown

Monthly salary and benefits for a young professional

• Gross Salary of 20,000 RMB
• Package Deal worth 27,500 RMB
  1. Housing - 12,000 RMB
  2. Daily Allowance (Meals & Laundry) - 5,500 RMB
  3. Yearly Travel Allowance - 10,000 RMB
• Monthly Chinese Language courses of 1,000 RMB
• With Elderly Care included for 2022 - 2,000 RMB

Example Tier 3 breakdown

Monthly salary and benefits for a senior professional

• Gross Salary of 40,000 RMB
• Package Deal worth 30,500 RMB
  1. Housing - 15,000 RMB
  2. Daily Allowance (Meals & Laundry) - 5,500 RMB
  3. Yearly Travel Allowance - 10,000 RMB
• Children's Education - 17,000 RMB
• Monthly Chinese Language courses of 1,000 RMB
• Elderly Care included for 2022 - 2,000 RMB

Example Tier 2 breakdown

Monthly salary and benefits for a director or manager

• Gross Salary of 80,000 RMB
• Package Deal worth 30,500 RMB
  1. Housing - 20,000 RMB
  2. Daily Allowance (Meals & Laundry) - 5,500 RMB
  3. Yearly Travel Allowance - 16,000 RMB
• Children's Education - 17,000 RMB
• Monthly Chinese Language courses of 1,000 RMB
• With Elderly Care included for 2022 - 2,000 RMB

Example Tier 1 breakdown

Monthly salary and benefits for executives

• Gross Salary of 100,000 RMB
• Package Deal worth 46,500 RMB
  1. Housing - 25,000 RMB
  2. Daily Allowance (Meals & Laundry) - 5,500 RMB
  3. Yearly Travel Allowance - 16,000 RMB
• Children's Education - 17,000 RMB
• Monthly Chinese Language courses of 1,000 RMB
• With Elderly Care included for 2022 - 2,000 RMB

Benefits in the Pearl Delta

There is, however, an area where China has kept special tax incentives, and that is in the Pearl Delta in cities like Guangzhou, Shenzhen, Foshan, to name a few, where an annual rebate can be applied to bring the effective tax rate on total remuneration down to 15%. The area is located close to the cities of Macau and Hong Kong, which are major hubs for international business and trade. 15% is in line with the tax rate in Hong Kong.

However, there are conditions to be eligible for the 15% tax deduction; the expat would need to have a specific Type A or B Visa and reside in the Pearl Delta for at least 90 days a year. Using the above four examples, the chart below shows the revised effective net loss of income between 2022 full tax and the application of the rebate and 15% final tax position:

What can expats and businesses do?

Generally speaking, a difficult conversation between the expat and the company needs to be had because the packages will become income for expats, as companies will have to uphold the contract package, thus causing an increase in taxes paid at the end of the year for both the company and the expat.

Companies can try to cover the expenses themselves, making sure the expat's income and benefits are not impacted, but that can create risks, especially for housing where the company would have to commit to renting for years. If the expat were to leave suddenly, the rent would still need to be paid regardless. Expats can take the initiative and ask accounting firms to conduct a tax plan for 2022 where the effects could be calculated and a solution devised. The answer could then be used to present to the company they work for, saving time and offering peace of mind for all parties involved.

Possible considerations for expats include moving or working remotely from the Pearl Delta, dampening the lack of fringe benefits considerably; the issues would be acquiring the right visa along with relocating. Additionally, dual contracts could be considered where an expat has an overseas, regional or global role and travels. Under the current rules on dual contracts and the rules governing worldwide tax exemption of expats, expats would get days credit on overseas income for their time overseas undertaking the overseas role.

In theory, if expats work abroad for a Chinese company, they could register their time to pay taxes in China while working anywhere else in the world. What is challenging to do is to find a way to prove that the employee with the contract had worked during those days; timesheets would be the go-to solution, but supporting documents would be needed as well. During Covid, this is an interesting solution, but it could be better applied in the future when travel picks up again; this is a consideration if someone does have dual roles within an organisation.

Key actions

Expat actions

• Tax planning - conduct a financial plan for the year 2022 to review the impact and possible planning options for the expat and the company
• Renegotiate the contract - approach the company's HR to discuss possible solutions preferably based on a financial plan
• Work from the Pearl Delta - change the vista and relocate to any of the cities in the Pearl Delta while still continuing your China operations

Company actions

• Internal audits - Conduct an internal audit of the current financial impact of the expat staff in the company and then devise financial solutions for them
• Company package, structure and location - Consider restructuring the company to allow expat staff to work from the pearl delta or remotely from anywhere in the world
• Hiring local talent - If the expat staff become considerably expensive, consider hiring local staff who might have the right experience in China and overseas