China: Tax Incentives for Expatriates and Small Businesses

The Chinese government, through the Ministry of Finance and the State Taxation Administration, confirmed in August 2023 that preferential tax policies for foreigners working in the country will be extended until December 31, 2027.

Expatriates in mainland China have enjoyed a special privilege for years, which grants tax exemption on fringe benefits such as housing rent expenses, children's education costs, language courses, flights to the home country, and other expenses incurred by foreigners who choose to work and live in the country. Previously, these advantages, which also included lower taxation on bonuses, were supposed to be abolished to ensure equal treatment between Chinese and foreigners and to align with the international tax regime in place as well as in the special administrative region of Hong Kong.

The latest preferential criteria aimed at promoting new talents do not distinguish based on citizenship but rather on the level of education and qualifications. For instance, in the island province of Hainan, there is a 15 per cent tax rate for qualified individuals designated as high-talent, regardless of their passport. The decision to extend this incentive solely for foreigners and across the entire territory of mainland China aims to attract workers from foreign countries. Furthermore, the mandatory diagnostic tests for Covid-19 have been revoked for all those entering the country, in an effort to reverse the recent trend of a significant reduction in foreign resident or expatriate managers.

The same strategy to attract foreign investments has been implemented for small business income taxes. Until the end of 2027, companies with profits up to three million yuan, equivalent to about 380 thousand euros, will be taxed at 5 per cent instead of the standard rate of 25 per cent. This special rate is even lower than the taxation regime in Singapore and Southeast Asian countries, where the attention of managers and entrepreneurs is turning to expand their regional presence in East Asia.

Additionally, as part of efforts to counter capital flight, China has reduced the stock transaction tax by half, previously set at 0.1 per cent. This measure, previously used only in 2008, has been adopted to restore confidence in what is the second-largest stock market by capitalization during a period marked by financial turmoil and concerns about the resilience of the economy.