Important update: On August 18, 2023, the Ministry of Commerce (MOF) and State Taxation Administration (STA) jointly issued the Announcement on the Continuation of Implementation of Individual Income Tax Preferential Policies Such as for Foreign Nationals’ Benefits (MOFCOM STA Announcement [2023] No.29).

The Announcement officially prolonged the preferential individual income tax (IIT) policy on fringe benefits for foreigners. It was initially set to end on December 31, 2023, but it was extended for four years until December 31, 2027.

This extension coincided with the renewal of another preferential tax policy in China, which applies to the annual one-time bonus for both foreign and Chinese resident taxpayers and the GBA IIT subsidy, also extending to December 31, 2027.

The extension has provided immediate relief to some higher-earning foreign workers. Without this extension, those facing high costs, such as for their children’s education, would have experienced a significant increase in their tax liability.

Overview of Existing Tax-Exempt Expatriate Allowances

Individuals who are tax residents of China are obliged to pay Individual Income Tax (IIT) over their China-sourced income. In China, Individual Income Tax is calculated based on the cumulative calculation method and IIT filing must be completed every month (a comprehensive overview on IIT can be found in our full article on Individual Income Tax).

Several deductions can be applied to lower an individual’s taxable income over which Individual Income Tax will be levied. Firstly, every employee in China, both Chinese and foreign, enjoys a standard monthly deduction of RMB 5.000 over their taxable income.

In addition, special additional deductions are available. Chinese citizens can claim 6 different types of “itemized deductions”, whereas the applicable legislation allows expatriates to claim part of their salary using tax-exempt expatriate allowances.

Chinese law does not limit the proportion of income that can be claimed via the aforementioned tax-exempt expatriate allowances but instead states that these expenses must be “reasonable.” In practice, the Chinese tax authorities will allow expatriates to claim up to 30%- 35% of their income via tax-exempt allowances. It should be noted that foreigners must obtain proof of the authenticity of the expenses in the form of a fapiao.

The table below provides an overview of the available tax-exempt allowances for expatriates:

Category	Requirements
Housing Rental	Expatriates may enjoy a deduction equal to the amount of rental. A valid fapiao must be obtained to prove the rental expense’s authenticity.
Children’s Education Expense	Applicable to schools registered and located in Mainland China. Tuition fees supported by valid fapiao and documentation provided by the school are eligible for deduction. Fees other than tuition, such as meals, transportation, uniforms, and lesson materials, are taxable.
Language Training	Applicable to language schools registered and located in Mainland China. Expenses must be supported by valid fapiao. Expenses for family member’s language training are non-deductible.
Home Flight	It must occur in the form of a reimbursement. Expenses for up to two round trips (flight, train, etc.) per year are deductible and must be supported by valid fapiao or receipts. Applicable only to travel between the city in Mainland China where the expatriate resides and their home country (travel to other destinations is generally not accepted). Other expenses, such as hotels, are considered non-deductible.
Meal and Laundry	Applicable to meal and laundry expenses occurred in Mainland China. Expenses must be reasonable and supported by valid fapiao.
Relocation Expenses	It must occur in the form of a reimbursement. Expenses must be genuine, reasonable, and supported by valid fapiao or receipts.

Expatriate income transfer rules in China allow certain tax preferences under the Individual Income Tax system, but claiming preferential treatment requires understanding eligibility and application procedures. MSA Asia’s China tax advisory team helps expatriates and employers through IIT options. Engage with us on your tax planning.