Empowering the Greater Bay Area: Tax Incentives for Skilled Professionals
In August, the Chinese Ministry of Finance, in collaboration with the tax authorities, issued over 20 normative acts (NPA) with a single objective: to extend the tax incentives that are currently in effect until the end of 2023. These incentives primarily aim to support small businesses (reducing taxes for the businesses themselves and providing indirect support to the cost of financing for SMEs), private investments, poverty alleviation, and benefits for individuals.
One of the most intriguing measures is the subsidy related to the Individual Income Tax (IIT) for highly skilled foreign professionals in the Greater Bay Area (GBA). What is the essence of this incentive?
The GBA encompasses the Hong Kong Special Administrative Region (SAR), the Macau SAR, and nine cities in Guangdong Province adjacent to the special zones, including Shenzhen and Guangzhou. China is actively developing the GBA and aims to attract foreign professionals to this region, along with experts from Hong Kong. However, there is a challenge: highly skilled specialists typically earn high incomes, which would result in higher taxes in mainland China compared to Hong Kong.
The Progressive Tax Scale for employment income in mainland China ranges from 3% to 45%, with deductions for non-taxable minimums (for tax residents: 60,000 Chinese Yuan annually) and other allowances. The majority of the population in China either pays minimal or no IIT, but for individuals with substantial incomes, the tax amount can be significant. In Hong Kong, there’s also a progressive tax scale for salaries, but the tax cannot exceed 15% of the total income. Therefore, working in Hong Kong becomes more advantageous with higher salaries compared to neighboring mainland cities (which is the context for the GBA concept).
To ensure that this advantage doesn’t hinder the flow of talent, qualified and valued professionals in the Chinese segment of the GBA are provided a subsidy. This subsidy covers the difference between the IIT amount that should be paid according to Chinese legislation and the tax amount that should be paid in Hong Kong. The subsidy is not subject to IIT and is paid directly to the employee or employer. As a result, the effective income tax amounts paid in Hong Kong and nearby mainland cities are leveled, and the differences between Hong Kong and cities like Shenzhen, Guangzhou, and Zhuhai (at least in terms of taxes) are nearly eliminated.