After the long vacation for Chinese Spring Festival, many companies will have to recruit new employees as there is always a resignation tide after the annual year-end bonus was distributed. During the recruitment, many companies will encounter the problem on the arrangement of salary and allowance for certain employee. A sound arrangement will attract the most competitive employee to stay and serve for you. We received an inquiry from one of our clients that one of their expatriate employees would like to claim meal allowance of RMB15,000 per month. They are not sure whether such claim is reasonable or not.
In China, there are certain types of tax exempt allowances prescribed for expatriate employees including housing subsidies, food allowances, moving fees, laundry fees, travelling allowances, transportation expenses for visiting relative (twice a year), language training expense and children education expenses. All these are required to be paid in non-cash form or in the form of cash reimbursement, and the amount of each type of allowance should be reasonable. According to Chinese law, the local tax authority should be responsible for determining whether the amount of allowance is reasonable for applying tax exemption.
When a company arranges for tax exempt allowances for foreign employees, as China lawyers, we suggest that following factors should be taken into consideration to help ensure the reasonableness standard of the China tax authorities is met:
A. Whether it is the actual expenses. For example, the reasonability of housing rent should depend on the average rental expenses cost within the same area where the housing is located. Thus, rental allowance should not be excessively higher than the average rental cost within the same residential area.
B. Whether the proportion of the total amount of tax exempt allowances to the total amount of the company’s revenue is within reasonable limit. Competent authority frequently decides that the amount of allowances within 30%-50% of total revenue should be reasonable.
C. Whether formal invoices are issued for tax exempt allowances. Tax authorities will calculate the amount of allowance and tax only based on formal invoices, called “fapiao” in Chinese, not regular receipts issued by a restaurant, hotel or other service vendors. Those invoices should be sealed with the financial chop. Therefore, it is important to ask for formal invoices from service vendors and keep them for further examination.