On July 28, 2015, the State Administration of Taxation (“SAT”) issued Shui Zong Han [2015] No. 409 (“Circular 409”) to strengthen the administration for collecting individual income tax (“IIT”) on electronic red envelopes.

In recent years, electronic red envelopes, defined as incentives companies randomly distribute to individuals to advertise, promote and increase their business, have become a popular way to attract new customers and ensure client loyalty. However, before Circular 409, which was distributed internally to local tax authorities instead of being publicly released, there was no clear guidance on their taxation.

Circular 409’s main highlights:

  1. Electronic red envelopes containing money that companies give to individuals are subject to IIT, which the companies must withhold.
  2. Electronic red envelopes containing coupons that companies give to individuals to buy products or services, or containing cash refunds after individuals have spent a certain amount, are considered a price discount and are not subject to IIT.
  3. Electronic red envelopes individuals give each other are not considered taxable income and are not subject to IIT.

Date of issue: July 28, 2015. Effective date: July 28, 2015.