Foreigner Income Tax Policy in China in 2022
Intro: Foreigner income tax dilemma
Things are about to change for foreign working professionals in China in January. New foreigner income tax policies include everyone working in China on a work visa, so everyone must understand what these new taxes for foreigners are and what this all means in the long run.
The first thing we should clear up is that this isn’t just one policy change, but a series of changes to the foreign individual income tax (IIT) that are all happening around the same time. It all started with the changes to the Chinese social benefits contribution and will continue with the end of allowances through tax deductions for working foreigners in January 2022.
Healthcare Insurance & Pension Fund
The new social benefits law makes paying for social benefits mandatory as opposed to optional for foreigners.
Starting mid-August 2021, the government said they would enforce the social benefits contribution (healthcare insurance and pension fund) for foreigners and issue hefty fines to companies and employees for not complying.
The social benefits include the housing fund, healthcare insurance, and pension fund. Foreigners are still exempt from the housing fund.
Healthcare insurance takes 2% off gross salary and provides basic insurance at Chinese public hospitals. The pension fund takes 8% off gross salary. That is 10% of gross salary going to social benefits. A foreigner can claim both of these funds back when leaving China. Full pension and everything that wasn’t used on healthcare insurance will be paid back, but for most foreigners, 10% less cash in hand is an inconvenience to say the least.
No More Deductions – Coming January 2022
In the current version of the Chinese Individual Income Tax Law, foreign nationals (and locals) are allowed to deduct expenses from their gross salaries (up to 30%) when calculating taxes. Common expenses include rent, meals, school fees for those who have kids, and other things deemed “acceptable” by your companies.
In January 2022 the new IIT law will go into effect so that foreigners can no longer deduct expenses off of their taxable incomes. Understandably, this is the “smackdown” change that will see a lot of foreign nationals leave China. The more money you earn, the more you are affected by this policy. In other words, the more money you earn, the more likely you are to leave China over this.
[box type=”info” align=”” class=”” width=””]For example, “Miloš”, an expat on a ￥1,000,000 yearly package. He pays ￥200,000 per year for rent and ￥100,000 for his child’s school fees.
Because of the deductibles (rent and education), his taxable income is lowered to <￥700,000. He is in the 30% tax bracket and pays ~￥130,000 in taxes for the year.
He takes home ￥570,000. Without deducting expenses, “Miloš” is now in the 35% tax bracket and his taxable income is just below ￥1,000,000. He now has to pay over ￥240,000 in taxes on top of his expenses. He takes home ￥460,000 instead of ￥570,000. This affects every foreigner benefiting from expense deductions.
Someone making a comfortable ￥30,000 per month can deduct up to ￥9000 in expenses with the current system in place. That’s roughly ￥28,200 net after tax. After January 2022, this will be ~￥26,400 after tax and that’s not even taking into account the social benefits contribution.[/box]
Conclusion and what this means
Undoubtedly, a sizable number of expats are going to be on their way out of China in 2022. Because their bottom line is lower and employers don’t have the same cost incentives to hire foreigners. Plus, with the social benefit, you can expect 10% of your paycheck to be withheld without really adding any value. It’s important to look at the ways this could have a positive impact on foreign talents in China. For one, less supply of foreign talent in China means more stress on-demand in most situations.
Some of you may remember when China made being a citizen of a native English-speaking country a requirement for a work visa as an English teacher. Then, during the pandemic, only work visa holders could stay in China, and we saw an influx of teaching jobs at very high entry salaries >￥30,000/month pop up left and right.
While the resulting landscape won’t be as dramatic, there is a chance something similar will happen and demand will regulate itself to the new supply.
One counterargument to this is the influx of overseas Chinese returning to China because of the pandemic. These are Chinese citizens who lived, studied, and worked abroad. Many of them are fluent in English and other languages. They are well adjusted to the west and can adequately fill “foreigner” positions. But similar to the pandemic situation, in many cases, this influx is temporary and not sustainable. Already, the amount of people coming back to China is way less than last year, and many are already planning their voyage back.
