On 6 December 2013, Ministry of Finance, Ministry of Human Resources and Social Security and State Administration of Taxation jointly promulgated the Notice on Issues Concerning Individual Income Tax on Corporate Annuity and Occupational Annuity (the “Notice”), which for the first time establishes China’s annuity policy regarding individual income tax (the “IIT”) collection deferment. The Notice has been effective as of 1 January 2014.

According to the Notice, IIT collection deferment can be construed as: in the stages of annuity contribution and annuity fund investment, individuals are temporarily exempted from paying IIT. The collection of IIT would be deferred until individuals actually receive annuity money. Specifically,

  1. In the Contribution of Annuity: For the corporate annuity and occupational annuity contributed by entities for their overall employees pursuant to relevant policies, such annuity will be exempt from IIT temporarily when it enters into individuals' accounts. For the annuities contributed by individuals pursuant to relevant policies, for the portion not exceeding 4% of the tax base of taxable salary, it will be temporarily deducted from the current taxable income.
  2. In the Investment of Annuity Fund: When the distribution of investing and operating income from annuity fund goes to individual's account, it will be exempt from IIT temporarily.
  3. In the Grant of Annuity Money: When an individual reaches the statutory retirement age, his or her annuity money received will be fully subject to IIT at the tax rate applicable to the item of "incomes from wages and salaries ".

In addition, the Notice also specifies the following issues:

  1. Tax Base for Individual Payroll: The tax base of individual payroll contributed to corporate annuity is the average monthly salary of the individual for the last year; to occupational annuity, the tax base is the sum of employee's post wage and grade wage. For the part of average monthly salary in excess of 300% of the average monthly salary of the city with districts (where his workplace locates) for the last year, it will not be included into the contribution base of individual payroll.
  2. Declaration of Tax
  1. After the Annuity Scheme is established, the entity should, within the first 15 days of the following month of establishment, submit to competent tax authority where it locates the annuity scheme, the scheme filing letter issued by department of human resources and social security, the scheme confirmation letter and other relevant documents required by competent tax authority.
  2. For the contribution of annuity, the taxes concerned should be withheld by the entities individuals work for, subsequently declared and paid to competent tax authorities.
  3. When annuity money is granted, individuals’ tax payable should be withheld by the custodian entrusted by trustee on behalf of the trustor. The annuity account manager should promptly provide the custodian with a detailed statement on the payment of individual income tax relevant to annuity and corresponding individual income tax. The custodian shall, based on the materials specified by the trustee and provided by the account manager, calculate the tax payable pursuant to relevant regulations, and make declaration and payment to competent tax authorities.

KWM Comments: The Notice for the first time establishes the annuity policy on IIT collection deferment and is expected to promote the formation of a multi-layer social security system. However, the scope of tax preferences in the Notice is limited to the part of individual contribution, it is uncertain whether the Notice would encourage more enterprises to establish annuity schemes.