Annual bonus preferential treatment extended to 2023
On December 29, 2021, the State Council decided to continue implementing several preferential policies related to individual income tax. The measures, aimed to reduce the tax burden for low and medium-income taxpayers, will extend the preferential treatment of the annual bonus until December 31, 2023, meaning that the annual bonus received by employees can be taxed separately from other employment remuneration as salaries and other benefits in 2022 and 2023.
The preferential policy for annual bonus was introduced in 2005 by the Circular Guoshuifa  no. 9 issued by the State Administration of Taxation on “Adjusting the Method of Calculating and Imposing Individual Income Tax on Annual One-off Bonuses and other Benefits Obtained by Individuals”. According to the preferential policy, the annual bonus can be declared as separate income once a year, and the individual income tax payable is determined in two steps:
The gross amount of the annual bonus is divided by 12 to determine the applicable marginal tax rate and the quick deduction by referring to the below tax rate table.
The tax payable is calculated as: Annual bonus x Applicable tax rate – Quick deduction
However, in 2019, the Ministry of Finance and the State Administration of Taxation issued Circular Caishui  no. 164, on “Issues concerning the Connection of Relevant Preferential Policies after the Revision of the Law on Individual Income Tax”, according to which the preferential tax treatment for the annual bonus was expected to end in 2021, requiring taxpayers to consolidate the annual bonus into their comprehensive income starting from 2022.
The extension of the preferential treatment on the annual bonus until the end of 2023 has been favorably welcomed by Chinese and foreign employees working in China.
Taxpayers subject to a high marginal tax rate can obtain significant tax savings from the extension of the preferential tax calculation. For instance, a manager subject to the top marginal tax rate of 45% on his employment income who is receiving an annual bonus of RMB 200,000 can obtain RMB 51,410 of tax savings.
In addition, the State Council extended two other policies:
The exemption of the overdue tax for taxpayers with an annual income not exceeding RMB 120,000, with underpaid individual income tax liability not exceeding RMB 400 after the final year-end settlement is extended until the end of 2023; and
The equity incentive from listed companies can be taxed separately from the yearly comprehensive income until the end of 2022.
According to the figures released by the State Council, the extension of the three policies above will bring tax cuts for RMB 110 billion.