The Chinese government makes efforts on reducing the tax burden of employees. One of the measures is to make trial of the Individual Income Tax (“IIT”) deferral policies in some areas by allowing the employees to deduct the expenditures of purchasing commercial pension products from the taxable incomes for IIT purposes. This is based on the Notice on Implementing the Pilots on Individual Income Tax (“IIT”) Deferral of Commercial Pension with the number Caishui [2018] No. 22 jointly issued by the PRC Ministry of Finance, Ministry of Human Resources and Social Security, China Bank and Insurance Regulatory Commission and China Securities Regulatory Commission on 2 April 2018. The pilot period started from 1 May 2018 and would last for one year. It can be expected that the validity period of such trial policy may be extended next year and the geographic coverage may gradually be expanded nationwide.

Who can enjoy the IIT deferral policy?

The employees, whoever are Chinese or foreigners, as long as they receive salaries from the same employer continuously for 6 months or above in the pilot areas of Shanghai, Fujian Province and Suzhou Industrial Park, can enjoy the IIT tax deferral policy.

What is the IIT deferral policy?

The qualified employees may purchase every month the tax-deferred commercial pension products with an upper limit expenditure of 6% of his/her monthly salary income with a cap of RMB 1,000. Such expenditure can be deducted from the taxable personal incomes of that month for IIT calculation purpose. The employees also temporarily do not need to pay IIT for the investment incomes derived from the commercial pension products during the premium contribution period. When the employees extract the commercial pension benefits according to the contract conditions, they are obliged to pay the IIT only for 75% of the total amount at the rate of 10%.

How to implement?

As the first step, a qualified employee must have a taxpayer-designated exclusive personal bank account registered on the platform established by China Insurance Information Technology Co., Ltd (“CIITC”) for the purpose of the collection of premiums, distribution of investment incomes of the pensions and extraction of pension funds, and then the employee can choose to buy the tax-deferred commercial pension products from the life insurance companies which are qualified to provide such products. Until now there are 12 Chinese insurance companies which can provide such service.

The employee who purchased the tax-deferred commercial pension products is obliged to provide the “tax deduction voucher of tax deferral pension products” (“Voucher”) issued by the CIITC platform to the employer, and the employer is obliged to correctly make deduction for IIT calculation purpose during the premium contribution period while withholding IIT for the employee.

When the employees extract the commercial pension benefits according to the contract conditions, the insurance company should act as the taxpayer’s IIT withholding agent at that time.

What can the companies do for the employees?

The companies registered in the pilot areas of Shanghai, Fujian Province and Suzhou Industrial Park may check with the employees if they have purchased or intend to purchase the tax-deferred commercial pension products. If any employee has purchased any tax-deferred commercial pension product, the company can remind the employee (i) to print the Vouchers issued by the CIITC platform on a monthly basis and (ii) to submit the Vouchers to the company before the monthly IIT withholding declarations are made by the company.

The company should prepare the IIT calculation sheets based on the relevant staff’s monthly payroll as well as the Vouchers provided by the employees who have purchased the commercial pension products, and correctly calculate the taxable incomes for these employees for IIT purpose.