Tax incentives for the lump sum annual bonuses earned by residents in China will continue for the next three years, the Ministry of Finance said on Thursday.
In addition, the government has also adjusted the personal income tax rules to ease the overall tax burden of residents, including foreign residents.
The favorable tax treatment, which started in 2005, considers the lump sum annual bonus as an independent income source of an individual. In normal taxable income calculations, the lump sum bonus is added to the total earnings for tax purposes, whereas in special treatment, the two are considered separately for taxes, with the bonus income attracting lower tax rates in general.
Retention of the favorable clause will help the country's ongoing efforts to ease the tax burden of individuals, analysts said.
Six categories of special individual income tax deductions will take effect along with the amended personal income tax law from Jan 1, 2019. The increase in the threshold for personal income tax exemption from 3,500 yuan ($510) to 5,000 yuan per month has already come into effect from October this year.
Treatment of the lump sum annual bonus as separate from other incomes, however, is not in line with the tax rules under the amended personal income tax law. The special treatment will be lifted in 2022, said the ministry.
"In the long run, it is appropriate to cancel the treatment to better conform to basic taxation principles and guarantee smoothness in fiscal income," said Zeng Kanghua, a public finance professor with the Central University of Finance and Economics in Beijing.
Even without the special treatment, other personal income tax adjustments could still bring considerable benefits to the individual tax burden, especially for young and middle-aged people, Zeng said.
From 2019 to 2021, foreign residents in China can choose to enjoy either the newly introduced special tax deductions, or the tax exemption from housing allowance, language training fee, and children's education allowance, the ministry said.
But from 2022, foreign residents will only be allowed to enjoy the special tax deductions, as domestic residents do.
Zeng said the cancellation of tax benefits only for foreigners conforms with international conventions and the fundamental principle of an open market economy, to ensure equal treatment for domestic and foreign market participants.