China authority decided on December 29, 2021 to extend the current IIT preferential treatment provided in Circular 164. Specifically, (1) the preferential income tax treatment for the annual one-time bonus, which expires by the end of 2021 according to Circular 164, will extend to the end of 2023, and (2) the preferential income tax treatment for the equity-based incentives, which expires by the end of 2021 according to Circular 164, will extend to the end of 2022. We expect the China tax authority will issue a formal circular in the next few days.
Under Circular 164,
- IIT on annual one-time bonus may be calculated without aggregating it with one’s comprehensive income, and based on the marginal tax rate applicable to 1/12 of the annual one-time bonus amount (the marginal tax rate varies depending on the quantum of income, so this calculation approach lowers the marginal rate applicable);
- IIT related to equity-based incentives is calculated separately from the taxpayer’s other comprehensive income and is subject to tax at the applicable (annual) marginal tax rate, provided however that the equity-based incentives are recognized by the tax authority and for such purpose filings/registrations under Circular 35 are required.
