Summary
China’s State Administration of Taxation, the Ministry of Finance, and the Ministry of Human
Resources and Social Security (MHRSS) jointly issued guidance on 6 December 2013 (Circular Cai
Shui [2013] No. 103), that provides for the deferral of individual income tax (IIT) on an
“enterprise annuity.” Circular 103 applies from 1 January 2014.
Enterprise annuity is a supplementary pension plan that Chinese companies may establish according
to a decree issued in 2004 (Decree No. 20 of the Ministry of Labor and Social Security (the predecessor of MHRSS)). Under
a typical enterprise annuity, both the employer and employee make monthly contributions to the
annuity fund, although the annual employer contribution may not exceed 1/12 of its total salary
expenses of the preceding calendar year. Before Circular 103, both the employer and employee
contributions were taxable at the time the contribution was made. Circular 103 shifts the taxation
point to the time the funds are withdrawn from the annuity fund.
Key implications
1. An employer’s contribution is exempt from IIT in the hands of the employee provided the
contribution is made within the limits set by the relevant regulations.
2. An employee’s contribution of no more than 4% of his/her salary tax base is deductible from
the employee’s salary for IIT purposes. The salary tax base is the employee’s average monthly
salary of the preceding calendar year, but is capped at three times the local average monthly
salary of the preceding calendar year.
3. The allocation of the fund earnings to the employee’s individual account is exempt from IIT.
4. After an employee reaches the statutory retirement age, the monthly withdrawal of the annuity
fund from his/her individual account will be subject to IIT as wages and salary, at tax rates
ranging from 3% to 45%. If the withdrawal is made on a quarterly or an annual basis, it will be
spread evenly over the relevant period and taxed monthly.
5. A lump-sum withdrawal due to the employee’s immigration abroad or death will be spread evenly
over 12 months
and taxed monthly. However, a lump-sum withdrawal for any other reason will be treated as a
separate monthly salary – no spread will be allowed.
6. The employer must register with competent tax authorities within the first 15 days of the
month following the month an annuity plan is set up and the following documents must be submitted to the authorities:
the annuity plan, the letter of filing, the confirmation letter issued by the MHRSS (or its local
branches), and any other documents required by the tax bureau. If a change is made to an annuity
plan, the trustee, the custodian, etc., relevant documents must be submitted to the competent tax
authorities within the first 15 days of the month
following the month in which the change is made.
The tax deferral policy on enterprise annuity aims to stimulate the development of the supplementary pension system. The
tax exemption at the time of contribution and the earnings allocation provided in Circular 103 have some similarities with
the “401k plan” in the United States
The new tax policy on annuity will offer employers scope for compensation structuring that will benefit both employers and
employees:
Enterprises that already have instituted an annuity plan should consider reviewing the plan to provide a more tax efficient
compensation package to employees;
Enterprises that currently do not have an annuity plan may find that Circular 103 will offer a compensation
structuring opportunity for their employees; and
Multinational corporations that would like to set up enterprise annuity plan to benefit its local and expatriate
employees should note that:
o Only employers that have participated in government statutory pension insurance for their employees are
permitted to set up enterprise annuity plans; and
o For any foreign nationals (foreign assignees or local hires) that would like to participate in an annuity plan,
it is essential to confirm that they are able to withdraw the amount on their personal account when they
permanently leave China. Since local practices may vary from location to location in China, companies
should consult with their advisers.
Courtesy of Deloitte Touche
Comments are closed