IIT for Foreign Employees: What Is Taxable

A foreign employee's China package rarely looks like a single salary line. It usually reads: base salary, a housing allowance, international school fees, a language-training stipend, annual home leave, maybe a car. Ask which of those is taxable and the honest answer is: it depends on one election the employee makes, and most expatriates make it badly or not at all.

The election is between China's special additional deductions and a much older set of duty-free allowances that only foreign nationals can use. Where the numbers land is not a rounding difference — on the package below it is roughly 102,900 yuan a year, about a sixth of the tax bill.

Who this page applies to

Two things have to be true before any of it matters.

First, the person must be a resident individual. Under Article 1 of the Individual Income Tax Law, that means either having a domicile in China, or having no domicile but residing in China for a cumulative 183 days or more in a tax year. Residents are taxed on worldwide income; non-residents only on China-source income. The day-counting rules — including the 24-hour rule and the six-year clock — are covered in China's 183-Day Rule.

Second, the person must be a foreign national. The allowance regime is nationality-based, not residence-based. A Chinese national returning from ten years abroad cannot use it, even with a foreign permanent residence card. Conversely, a foreign national who becomes a resident gets the choice.

A non-resident foreign national gets no choice at all. The 2023 announcement that governs this is explicit: the allowances are available to foreign individuals who meet the conditions for resident individual status. If the person stayed under 183 days and has no domicile, the question never arises.

What counts as taxable pay

The taxable base is not the number in the employment contract. Article 6 of the Individual Income Tax Law taxes wages and salaries, and the implementing regulations (State Council Order No. 707) read that broadly: base pay, bonuses, year-end increments, overtime, allowances and subsidies, profit-sharing, and benefits in kind.

Four categories routinely get misclassified:

• Equity compensation. Stock options and restricted stock are taxed when the right is exercised or vests, not when granted. The spread between exercise price and market value is wage income.
• Benefits in kind. A company-leased apartment or a car provided for personal use is taxable at market value — unless it qualifies under the housing allowance rules below.
• Board and supervisory fees. For directors and senior management, remuneration paid or borne by a Chinese resident enterprise is China-source income regardless of where the duties are performed. MOF and STA Announcement No. 35 of 2019 settles this.
• Reimbursed expenses that are really pay. A fixed monthly "relocation allowance" is salary. A one-off, receipted move at the start of the assignment is not. The distinction is set out in the 1997 circular discussed below.

The eight duty-free allowances

These trace back to Caishuizi [1994] No. 020 and were given operative detail by Guoshuifa [1997] No. 54. They survived the 2019 rewrite of the individual income tax system, and the current extension runs to 31 December 2027 under MOF and STA Announcement No. 29 of 2023.

Notice what the table does not say: it does not say "any amount the employer is willing to pay." Every line is bounded by reasonableness, and three of them carry a location test that ends the conversation for a lot of expatriate families — more on that below.

What the allowances actually require

Cash does not qualify. The rule is non-cash form or reimbursement against actual expense. A housing allowance paid into the employee's bank account alongside salary, with no lease or invoice behind it, is simply salary. This single point probably accounts for more failed claims than everything else combined.

Paperwork is required, and the approval step is gone. Under Guoshuifa [2004] No. 80, Article 14, the tax authority stopped pre-approving these exemptions in 2004. That did not relax anything — it moved the burden. The taxpayer now supplies the evidence at filing, and the authority reviews afterwards. Where the evidence does not establish that an allowance was reasonable, the authority can require resubmission, and where it is never produced, the allowance is adjusted back into taxable income.

The relocation trap. Guoshuifa [1997] No. 54, Article 2 allows a reimbursed move to be exempt — and then adds, in the same article, that where a company pays a "relocation fee" monthly or at regular intervals to a foreign employee, those payments are wage income and taxable. Employers who spread the move over twelve instalments to smooth cash flow convert a legitimate exemption into salary. If your payroll shows relocation every month, that line is taxable.

Allowances or special deductions — not both

Article 1 of Announcement No. 29 of 2023 gives a resident foreign national a choice: take the standard special additional deductions available to everyone, or take the eight allowances. Not both, and the choice cannot be changed within a tax year.

The deductions side is fixed by regulation: children's education at 2,000 yuan per child per month, housing rent at 1,500, 1,100 or 800 depending on city tier, elderly support up to 3,000, plus continuing education, serious illness medical costs, and infant care. These are flat amounts. The 2023 increase from 1,000 to 2,000 for children's education and infant care came from Guofa [2023] No. 13; the underlying framework is Guofa [2018] No. 41.

Because the deductions are flat and the allowances are actual, the choice turns on one question: does the employee's actual spending exceed the flat deduction? For an expatriate family paying 200,000 yuan a year in international school fees and 180,000 in rent, the allowances win by a wide margin. For a single employee in a company dormitory with no children in China, the flat deductions are simpler and often larger.

Worked example: two elections, one salary

A foreign national is a China tax resident for the full year. Monthly package: salary 60,000, housing allowance 15,000, children's school fees 10,000, language training 3,000. Annual total 1,056,000. Assume no social insurance contributions and no other deductions, to isolate the effect of the election.

Election A — special additional deductions. The whole 1,056,000 is taxable wages. Subtract the 60,000 annual basic deduction, 24,000 for children's education (2,000 × 12) and 18,000 for housing rent at the 1,500 tier. Taxable income is 954,000.

Election B — the eight allowances. Housing, school fees and language training are exempt, so only the 720,000 salary is taxable. Subtract the same 60,000 basic deduction. Taxable income is 660,000.

The gap is 102,900 yuan — 41% of Election A's tax bill, from a decision that takes one line on a form.

Two caveats on the arithmetic. First, if the employer bears the tax itself, the figure changes materially; the calculations above assume the employee bears it. Second, the 660,000 sits exactly on a bracket boundary in the annual comprehensive income table (30% up to 660,000, 35% above), so a small change in the package moves the answer more than proportionally.

Where claims fail

• Cash in lieu. The single largest cause. An allowance with no receipt is salary.
• School fees for a child educated abroad. The exemption in Guoshuifa [1997] No. 54, Article 5 is limited to education the child receives inside China. Boarding school in Singapore does not qualify — but the flat 2,000 per month child deduction still does, so this is a case for Election A.
• Language training outside China, or not really training. Same location test, and the course must be a course.
• Housing far above market. A serviced apartment at triple the local rate invites an adjustment; the standard is reasonableness, not "whatever the lease says."
• Switching mid-year. The election is locked for the tax year. Discovering in November that the other option was better does not reopen it.
• No evidence at the time of filing. Since the pre-approval was abolished in 2004, nothing is checked up front — which is precisely why it gets checked afterwards, with adjustment.

What the employer has to withhold

The employer withholds monthly under the cumulative withholding method and reports exempt income separately from taxable income on the withholding return — the two are not netted together. Employees who want to claim the allowances during the year provide the evidence to the employer; those claiming at annual reconciliation file it themselves.

Practical consequence for finance teams: the payroll system needs a field that distinguishes exempt allowance from taxable allowance, and a document trail behind each exempt line. Where that field does not exist, everything defaults to taxable and the employee overpays — quietly, every month.

The related question of how the taxable portion is computed for someone who is in China part of the year is covered in the residency page; the rate schedule itself is in China IIT brackets.

Sources and current status

All positions above rest on documents that are currently in force. Each is cited with its full number because shortened citations in this area are routinely wrong — the 2021 extension and the 2023 extension are different instruments, and several widely circulated summaries still cite the version that expired at the end of 2021.

• Individual Income Tax Law of the PRC, Article 1 (residence) and Article 6 (taxable income) — seventh amendment effective 1 January 2019.
• State Council Order No. 707, implementing regulations for the Individual Income Tax Law.
• MOF and STA Announcement No. 29 of 2023 — extension of the foreign-national allowance policy, effective through 31 December 2027.
• Caishuizi [1994] No. 020, Article 2 — the original eight-allowance exemption.
• Guoshuifa [1997] No. 54, Articles 1 to 5 — operative definitions and evidence requirements.
• Guoshuifa [2004] No. 80, Article 14 — abolition of pre-approval, retention of the evidence obligation.
• MOF and STA Announcement No. 34 of 2019 and No. 35 of 2019 — day counting and source rules for individuals without domicile.
• Guofa [2018] No. 41 and Guofa [2023] No. 13 — special additional deductions and the 2023 increase in three of them.

Status note. The allowance regime has a stated end date, 31 December 2027. It has already been extended twice and may be extended again, but a package designed around it should not assume the exemption survives past that date. Arrangements spanning 2028 should be modelled both ways.

This is a plain-English reference, not tax advice. Figures and elections depend on facts we cannot see, and local practice on evidence requirements varies between tax bureaus. Confirm with a licensed practitioner before filing.