Pursuant to Cai Shui  No. 1641 (“Notice 164”), the preferential individual income (IIT) policies for annual bonus, equity incentive income and expatriates’ allowances would have expired by the end of 2021. On 31 December 2021, the PRC Ministry of Finance (MOF) and the State Taxation Administration (STA) jointly issued Bulletin  No. 422 (“Bulletin 42”) and Bulletin  No. 433 (“Bulletin 43”) to extend the aforementioned preferential IIT policies. The extension is for two years with respect to annual bonus and expatriates’ allowances, and one year for equity incentive income.
The extension of the IIT preferential treatment for annual bonus, equity incentive income and expatriates’ allowances is welcome news for taxpayers. This indicates the Chinese government’s continuous efforts to reduce taxpayer’s IIT burden, especially the tax burden of middle and low-income groups who are facing greater pressure during Covid period.
Meanwhile, the fact that the policies are only extended for one or two years also indicates that the government’s plan to remove the preferential treatment in the future when the time is right, thereby achieving equal tax treatment among taxpayers, regardless of the composition of their employment income (i.e., annual bonus or equity incentive income vs. normal salaries and wages) and their nationality.
Meanwhile, it is also important to note that the Chinese tax authority has been paying increasing attention to IIT compliance in practice. For example, the STA imposed additional reporting obligation on companies for equity incentives under Shui Zong Ke Fa  No. 694, aiming to strengthen the administration of IIT compliance relating to equity incentive income. In light of this practical environment, companies are recommended to take measures to ensure the compliance with their IIT withholding and/or reporting obligations and address historic non-compliances (if any).
In more detail
On 29 December 2021, the Executive Meeting of the PRC State Council announced the decision to extend the preferential IIT policies for annual bonus and equity incentive income until the end of 2023 and 2022, respectively. Both policies were expected to expire at the end of 2021 in accordance with Notice 164. This news was first reported by the Network News Broadcast of China Central Television (CCTV) on 29 December 2021.
Two days later on 31 December 2021, the MOF and the STA jointly issued Bulletin 42 to effect the aforementioned State Council decision. Pursuant to Bulletin 42, the IIT policy to tax annual bonus derived by resident taxpayers separately from their current year’s comprehensive income as provided under Notice 164 will be extended until 31 December 2023, and the IIT policy to separately calculate tax on equity incentive income granted by listed companies to their resident employees as provided under Notice 164 will be extended until 31 December 2022.
On the same day, the MOF and the STA also issued Bulletin 43 to extend the IIT exemption treatment for certain qualified allowances (e.g., housing, language training and children’s education) derived by expatriate employees, which was also expected to expire by the end of 2021 in accordance with Notice 164. The extension is for two years, with expiration on 31 December 2023.