By separating the costs for relocation, education, housing, and other everyday living expenses from the employee’s taxable salary, the policy makes relocation more affordable for both foreign employees and their employers, making it easier for local companies to hire foreign talent.
The tax regime is part of a broader initiative to encourage foreign investment and innovation in the country, thereby facilitating knowledge transfers to the local population and strengthening domestic capacity.
Hiring an expat can be cheaper for international and Chinese companies
The expat tax benefits can sometimes make it cheaper than, or at least as financially viable, as hiring locals. This goes against the common assumption that it is more expensive to hire foreign employees because of the relocation costs and the need to incentivise the move.
With the preferential tax policy, companies can effectively pay a higher salary to expats at a lesser cost compared to locals who would have to receive a much higher gross salary to receive a comparable income after tax.
Since salary levels often reflect experience and skill, it can therefore be more cost-effective to attract and hire highly-skilled expatriates than highly skilled locals who they would in practise have to pay more.
This can help to attract foreign talent that might be deterred by high tax rates and living costs. “International schooling in China is [much more expensive] than local schools,” explained the country manager for AGS China, Thomas Coupat, “[Additionally], income tax can be up to 45 percent. [So with the policy], there are substantial savings for expats.” This might mean they are wiling to accept a lower net salary because they still walk away with the same or even greater funds than if they were paid more and taxed for the full amount.
Two ways to reduce income tax liability for employees in China
China’s tax regime has two different tax benefit policies. The first, the IIT, covers non-taxable perks for expats which are known as ‘benefits-in-kind’ (BIK) and is available to those who do not permanently reside in China, but who live there for 183 days or more in a given tax year. The policy allows for tax-exempt benefits for expats in the following eight categories:
- Housing rental expense
- Education expenses for children
- Language training expense
- Meal fee
- Laundry fee
- Relocation expense
- Business travel expense
- Home leave expense
These benefits can be excluded from income tax liability so long as the expenses are reasonable in amount and they are supported through valid documents, such as invoices, detailing the expenses.
There are sometimes other additional limitations. For example, although the benefit covers the expat’s cost of travelling home for a visit, only the costs of two trips per year are tax-exempt.
The second tax benefit policy is available to both expats and locals in China. These are known as ‘additional deductions’ which also allow several living costs to be separated from income and excluded from tax liability. It similarly covers expenses such as education, housing, and healthcare.
Importantly, expats can only choose to benefit from one of the tax policies, and since the additional deductions are generally much more limited than those allowed under BIK, foreign employees generally opt for the latter.
“This second tax policy of ‘additional deductions’ is also more of an administrative hassle for businesses, requiring more documentation than the BIK regime,” explains Coupat, “So unless it is a large company with many expats, they [might not bother applying].”AGS can refer you to an expert to help you apply for the preferential tax regime for your assignees.
China’s tax authority has recently introduced a new multi-lingual tax consultation service to help foreigners and cross-border companies navigate the ins and outs of the complex tax regime. The free service is available in eight languages and can be accessed through telephone, online platforms, and mobile devices. It forms part of the 12366 Shanghai (International) Tax Service Center.
Paying for relocations from within China is cheaper
Another fiscal policy which makes it cost-effective to send employees to China is the country’s ‘cash-based accounting’ system. Relocations for employees to and from China are not taxed if paid for from within the country, which can save businesses money. “[Many companies] pay China-related relocations in China to avoid paying tax on the relocations,” said Coupat, “If it’s paid for in China then it counts as an expense [that can be deducted from tax].” AGS Relocation can assist with this by providing receipts to prove local payments.
Need help relocating your employees to China? Contact us to discuss your immigration and moving requirements today!