Expats in China: still non-taxable allowances

Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at: https://www.panorama.it/economia/cina-proroga-agevolazioni-fiscali-expat

China is now the world's fastest-growing major economy, according to the World Bank, counting a gross domestic product that in 2021 increased by 8.1% compared to the 2020, accelerating from the growth rate of 2.2%. Its rapid rise of China is the result of a precise leadership choice that in recent years has aimed to encourage investment, both in terms of financial resources and in terms of human capital.

As far as human capital is concerned, several decision-making choices have provided to foreign workers resident in China, numerous tax benefits, including for example the provision of exemption to the main costs related to the permanence of the worker in Chinese territory (including, for example, housing costs, education of children, transport costs or language courses) and the application of a preferential tax regime on the annual wage bonuses earned.

However, since 1st January 2019 the new national income tax law has entered into force. It marked a turning point with respect to the previous political will, providing even for the income produced by foreign workers, the same taxation system provided for the locals, with the intention of equaling the treatment and, consequently, eliminating tax benefits already provided for the foreigners.

With the view to facilitate the transition between the two models of fiscal policy and in consideration of the huge lobbying impact made in the view of the entry into force of the new law, the Chinese Government had foreseen the application of a provisional regime until 31 December 2019, which further extended the tax benefits granted to foreign workers until 31 December 2021. This provisional regime provided that one-off annual wage bonuses were included in the total annual income or were subject to separate taxation at a lower rate.

The year 2022 was therefore awaited with great concern by the entire expat community in China (it should be considered that, according to the results of the seventh national census on 11th May 2021, there are about 845,000 foreigners living in China), since the tax benefits granted so far would have been disregarded. However, the further extension of tax benefits was finally announced on 31 December 2021, just… on the last possible day.

The extension is certainly encouraging and it is the result of a common advocacy work done throughout the EU Chamber of Commerce in China and many other foreign chambers of commerce, whose effort may be probably best proven by the several lobbying letters sent by them to the Chinese Premier Li Keqiang.

In particular, the EU Chamber of Commerce in China which daily works in support of Italian companies in Chinese territory to facilitate their access to the market, expressed great satisfaction with this extension, since it promotes the attractiveness of the Chinese market for all European companies.

After all, a different outcome could have led to a "mass flight" of foreign companies and citizens from the Chinese territory, which have decided to stay and invest in it, despite the risks and limitations to travel and the market crisis resulting from the Covid pandemics, that has already drove off foreign talents and companies due to the closed borders.  Indeed, costs would have been too much heavy to bear. Take for instance schools for foreign entrepreneurs’ sons. Being not Chinese citizens, they are rarely accepted in public schools, so that they have no option than studying at international private schools, which are some of the most expensive in the world, with costs that swing from 2,300 to 2.500 euros monthly.

Handling these data, it is possible to be aware of the great advantage of the legislative extension, which furthermore allowed foreign companies to block the setup of restructuring procedures, that were aimed to lessen the expected negative impact of the new national income tax law.

The results are therefore encouraging for all Italian companies, which, also as a result of the restoration of flights between the two countries, can start or implement their business in China. Definitely they are more encouraging, if we consider tax concessions as the necessary price to be paid by China in order to guarantee its presence in the old continent in an increasingly important way, through the strengthening its Belt and Road Initiative.