Notice on the Connection of Preferential Policies after the Amendment of the Individual Income Tax Law

关于个人所得税法修改后有关优惠政策衔接问题的通知

Caishui [2018] No. 164 (财税〔2018〕164号), jointly issued by the Ministry of Finance and the State Taxation Administration on December 27, 2018; effective January 1, 2019.

Sources:

• Chinese official text: Guangdong STA (guangdong.chinatax.gov.cn)
• Extension analysis: KPMG China Tax Alert, Issue 15, September 2023

This notice provides transitional rules for several preferential IIT calculation methods that existed before the 2018 IIT reform. It supplements the Individual Income Tax Law (as amended 2018) and the Implementation Regulations.

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Contents

• Section I — Annual One-Time Bonus
• Section II — Listed Company Equity Incentives
• Section III — Insurance and Securities Broker Commission
• Section IV — Enterprise and Occupational Annuity
• Section V — Severance, Early Retirement and Internal Retirement Pay
• Section VI — Below-Cost Housing Sold to Employees
• Section VII — Expatriate Allowances
• Section VIII — Other Preferential Policies
• Section IX — Effective Date and Repealed Documents
• Annex — Monthly Converted Comprehensive Income Tax Rate Table

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Section I — Annual One-Time Bonus

Separate Taxation Method (Extended to December 31, 2027)

Where a resident individual receives an annual one-time bonus that meets the conditions specified in the STA Notice on Adjusting the Method for Calculating and Levying IIT on Annual One-Time Bonuses (Guoshuifa [2005] No. 9), the bonus shall not be combined with the individual's comprehensive income for the year. Instead, the bonus is divided by 12 months and the resulting amount is applied against the monthly converted comprehensive income tax rate table (see Annex) to determine the applicable rate and quick deduction. Tax is then calculated separately:

Tax payable = Annual one-time bonus income × Applicable rate − Quick deduction

Resident individuals may alternatively elect to combine their annual one-time bonus with their comprehensive income for the year and pay tax accordingly.

SOE Executive Deferred Performance Bonus

Where a senior executive of a central state-owned enterprise receives deferred annual performance pay or tenure award income meeting the conditions of Guoshuifa [2007] No. 118, such income shall be treated the same as the annual one-time bonus above. Policy after the extended deadline is to be determined separately.

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Section II — Listed Company Equity Incentives

Separate Taxation Method (Extended to December 31, 2027)

Where a resident individual receives equity incentive income (stock options, stock appreciation rights, restricted stock units, equity awards, etc.) from a listed company that meets the conditions specified in Caishui [2005] No. 35, Caishui [2009] No. 5, Caishui [2015] No. 116 (Article 4), and Caishui [2016] No. 101 (Article 4(1)), such equity income shall not be combined with the individual's comprehensive income for the year. It is taxed in full as a separate item using the annual comprehensive income tax rate table:

Tax payable = Equity incentive income × Applicable rate − Quick deduction

Where a resident individual receives two or more equity incentive payments in a single tax year, all such payments shall be combined and taxed together under the formula above.

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Section III — Insurance and Securities Broker Commission

Commission income received by insurance marketing agents and securities brokers is classified as personal services income (劳务报酬). The taxable amount is calculated as follows:

1. Start with commission income excluding VAT;

2. Deduct 20% as expenses to arrive at the income amount (收入额);

3. Deduct business development costs (展业成本) at 25% of the income amount, plus applicable surtaxes;

4. The remainder is combined with the individual's comprehensive income for the year and taxed accordingly.

The withholding agent shall apply the cumulative withholding method as prescribed in the Withholding Measures (STA [2018] No. 61) when paying commission income.

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Section IV — Enterprise and Occupational Annuity

Regular Distributions

When an individual reaches the statutory retirement age and draws enterprise annuity (企业年金) or occupational annuity (职业年金) in accordance with Caishui [2013] No. 103, such income is not combined with comprehensive income and is taxed separately as follows:

Lump-Sum Distributions

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Section V — Severance, Early Retirement and Internal Retirement Pay

Severance Compensation

One-time compensation income received upon termination of an employment relationship (including employer-paid economic compensation, living subsidies, and other subsidies) is treated as follows:

• The portion within 3 times the local average annual employee wage of the prior year is exempt from IIT;
• The portion exceeding 3 times the local average is not combined with comprehensive income and is taxed separately using the annual comprehensive income tax rate table.

Early Retirement Subsidy

One-time subsidy income received for early retirement procedures is averaged over the number of years from early retirement to the statutory retirement age, and taxed separately:

Tax payable = {[(One-time subsidy ÷ Years to statutory retirement age) − Standard deduction] × Applicable rate − Quick deduction} × Years to statutory retirement age

Internal Retirement (内部退养)

One-time subsidy income for internal retirement arrangements is taxed in accordance with Guoshuifa [1999] No. 58.

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Section VI — Below-Cost Housing Sold to Employees

Where an employer sells housing to employees at a price below the acquisition or construction cost, and the arrangement meets the conditions of Caishui [2007] No. 13 (Article 2), the price difference is not combined with comprehensive income. The difference is divided by 12 months, and the monthly converted tax rate table is applied to determine the rate:

Tax payable = (Difference between market/cost price and employee purchase price) × Applicable rate − Quick deduction

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Section VII — Expatriate Allowances

Transition Period Choice (Extended to December 31, 2027)

Foreign nationals who qualify as resident individuals may choose one of the following two regimes:

1. Enjoy the Special Additional Deductions (children's education, housing loan interest, housing rent, etc.); or

2. Continue to enjoy the tax-exempt allowance regime under Caishui [1994] No. 20, Guoshuifa [1997] No. 54, and Caishui [2004] No. 29, which exempts housing subsidies, language training expenses, and children's education expenses from IIT.

The two regimes cannot be enjoyed simultaneously. Once the foreign national makes a choice, it cannot be changed within the same tax year.

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Section VIII — Other Preferential Policies

Other IIT preferential policies not addressed in this notice shall continue to be applied in accordance with the original documents.

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Section IX — Effective Date and Repealed Documents

This notice is effective from January 1, 2019. The following documents or provisions are simultaneously repealed:

1. Caishui [2001] No. 157, Article 1 (severance compensation);

2. Caishui [2005] No. 35, Article 4(1) (stock option taxation);

3. Caishui [2007] No. 13, Article 3 (below-cost housing);

4. Caishui [2013] No. 103, Article 3, Items 1 and 3 (enterprise/occupational annuity);

5. Guoshuifa [1998] No. 9 (employer discount on securities purchases);

6. Guoshuifa [1998] No. 13 (insurance marketing agent income);

7. Guoshuifa [1999] No. 178 (severance for contract termination);

8. Guoshuifa [2000] No. 77 (SOE employee severance);

9. Guoshuifa [2005] No. 9, Article 2 (annual bonus calculation method);

10. Guoshuihan [2006] No. 454 (insurance marketing agent commission);

11. Guoshuihan [2006] No. 902, Articles 7 and 8 (stock option supplementary rules);

12. Guoshuifa [2007] No. 118, Article 1 (SOE executive deferred pay);

13. STA Announcement [2011] No. 6, Article 2 (early retirement subsidy);

14. STA Announcement [2012] No. 45 (securities broker commission).

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Annex — Monthly Converted Comprehensive Income Tax Rate Table

This is the standard comprehensive income tax rate table converted to monthly amounts, used for Sections I (annual bonus), IV (annuity monthly distributions), V(2) (early retirement), and VI (below-cost housing).

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Summary — Extension Timeline

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Note: This is an unofficial translation. No official English text of Caishui [2018] No. 164 has been published. The Chinese original on guangdong.chinatax.gov.cn is authoritative. Third-party analyses from KPMG, EY, and China Briefing were used for cross-reference.