China: Minimal Guidance on Expatriate Compensation
Multinational companies face many challenges in providing benefits to employees stationed in China, Lawrence H. Sussman, a partner in the Beijing office of O'Melveny & Myers LLP, told a seminar sponsored by the American College of Employee Benefits Counsel.
To begin with, there is no federal income tax code in China, so every state or local tax bureau has its own set of laws and regulations. These agencies may provide guidance in the form of “circulars,” which are similar to the technical advice memoranda issued by the U.S. Internal Revenue Service, Sussman said. The statutory codes themselves are “thin,” and there is no equivalent to the U.S. Federal Register, so researching the circulars can be difficult.
Generally, an expatriate employee of a multinational company is subject to individual income taxes in China, Sussman said, and if that employee lives in China for five consecutive years, income tax is levied on worldwide income.
Among the exclusions or deductions from income allowed when calculating tax are mandatory pensions, housing allowances, children's education, language training, meal allowances, laundry expenses, travel allowances and home leave, and relocation allowances, Sussman said. To claim these reductions, however, taxpayers must obtain official receipts, and these can be hard to get because the providers of the services may not want to report all the income they receive.
Mixed Treatment of Stock Options
There is a significant amount of guidance on stock options, which are taxed in China much as nonqualified stock options are in the United States, according to Sussman. To receive favorable tax treatment, the employer must file a full Chinese translation of the stock plan with the local tax bureau.
There is no general guidance on restricted stock options, however, and no specific guidance on the tax implications of vesting or other restrictions, Sussman said, suggesting that employers “sell your story” to the local tax bureau to cut a deal on the taxation of these options.
Similarly, there is little or no guidance on salary reduction plans for expatriates, Sussman said, although the treatment of pensions follows the International Monetary Fund system including mandatory defined benefit plans funded by both employer and employee, in which both contributions and distributions are tax exempt, and voluntary and supplemental defined contribution plans, which provide no tax benefits.
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