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Human Resources and Payroll in China 2016-2017 (5th Edition) -
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[Example]
Jason receives an annual bonus of RMB 420,000, while Frank receives an annual bonus of RMB
420,001. To determine the tax rates applicable, the first step is to divide the bonus amount by 12:
Jason:
• RMB 420,000 / 12 months = RMB 35,000
• IIT rate = 25 percent
• IIT on the lump-sum annual bonus = RMB 420,000 x 25% – RMB 1,005 = RMB 103,995
Frank:
• RMB 420,001/12 months = RMB 35,000.08.
• IIT rate = 30 percent
• IIT on the lump sum annual bonus = RMB 420,001 x 30% – RMB 2,755 = RMB 123,247.1
As shown above, Frank’s annual bonus is RMB 1 more than Jason’s, but the total bonus income that
ultimately goes into Frank’s pocket is RMB 420,001- RMB 123,247.1 = RMB 296,753.9, which is less
than Jason (RMB 420,000- RMB 103,995 = RMB 316,005).
Secondly, it is important to remember that using an annual bonus will only be effective up to a
certain point. One must not assume that the higher the bonuses are, the lower the tax burden is, as
the tax rate for annual bonuses also increases correspondingly.When the compensation package for
certain employees for the whole year is of the same amount, the optimal annual bonus arrangement
actually varies from case to case.
To illustrate this point further, the chart below compares five different scenarios of income planning
(salary + annual bonus) for an expat working in China, earning a total income of RMB 120,000.
As can be seen, the ideal outcome is Scenario 2, inwhich the percentage of IIT paid on the employee’s
overall income is at its lowest. It may therefore require a bit of maneuvering on the employer’s part
to arrive at the ideal tax treatment.
To optimize your foreign employee’s compensation package, it is advisable to consult a tax advisor
prior to implementing a tax-efficiency plan. This can ensure that the arrangements are in compliance
with PRC individual income tax laws and that the related IIT liability is properly and legallyminimized.