(国家税务总局关于企业工资薪金和职工福利费等支出税前扣除问题的公告)

Under the EIT Law, reasonable employee salary expenses can be deducted when calculating taxable  income. Salary expenses   refer   to   cash   or   non-cash employment remuneration including basic salary, bonuses, subsidies, allowances, year-end salary increase, overtime pay and similar payments.

As the amount of employee salary expenses is the calculation basis for pre-tax deduction of other employee-related expenses, through Guoshuihan [2009] No.3, concerning  Pre-Tax  Deduction  of  Enterprise  Salary  and  Employee  Welfare Expenses, SAT provided the criteria for recognizing “reasonable salary expenses” and clarified that the deduction was only allowed when salaries were paid to employees.

With the issue of Announcement [2015] No.34 (“Announcement 34”), SAT has relaxed the pre-tax deduction requirements for salary expenses.

Main highlights:

  1. Qualified welfare allowances recognized as salary expenses for pre-tax deduction

Before the issue of Announcement 34, several types of employee welfare allowances were deducted before tax under “employee welfare expenses” instead of “employee salary expenses.”

According to Announcement 34, welfare allowances satisfying all the following conditions can be considered “employee salary expenses” for pre- tax deduction:

  1. They meet the criteria provided in Guoshuifa [2009] No. 3.3
  2. They are listed in the enterprise’s salary system.
  3. They are paid with the employee’s salary.

This increases the calculation basis for deduction limitations, raising the ceiling for employee-related costs deduction.

If any of the above conditions is not met, welfare allowances should still be deducted under “employee welfare expenses” and subject to deduction limitations.

  1. Accrued salary expenses paid to employees before EIT annual declaration is completed

Under Announcement 34, salary expenses accrued for the past year are deductible, as long as they are paid to the employees before the EIT annual declaration for that year is completed.

Before, deduction was only allowed when salaries were paid t o employees. This meant the cash-basis deduction would cause a difference with the salary expenses booked under an accrual basis, forcing enterprises to make timing adjustments at the end of the year (i.e., salary expenses booked for December but not yet paid to employees were not deductible for the corresponding year).

  1. Expenses related to dispatched employees

Under Announcement 34, enterprises should classify expenses related to dispatched employees into (i) labor service fees directly paid to the dispatching companies as agreed in the contract, and (ii) salaries and welfare benefits directly paid to the dispatched employees.

Salaries and welfare benefits paid to the dispatched employees can be included in the total salary amount as calculation basis by the enterprises accepting the dispatched employees, increasing the calculation basis for deduction limitations.

Announcement 34 applies to the EIT annual declaration for 2014 and onwards. It also applies to tax matters that have not yet been settled.

Date of issue: May 8, 2015. Date of effectiveness: January 1, 2014.