Individuals to Pay IIT on Gifts Received from Businesses

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Jun. 20 – While it is always nice to receive presents at companies’ promotional events, consumers in China should now make sure it is really a free lunch before accepting them. According to a recent circular co-issued by the Ministry of Finance and State Bureau of Taxation, individuals may need to pay individual income tax (IIT) on some gifts they receive under certain circumstances.

The “Circular on IIT Issues Related to Gift-Giving during Companies’ Promotion (Caishui [2011] No.50),” which was released on June 9, clarified the following three situations when individuals are subject to IIT payments after receiving gifts from a company:

  • The company gives gifts to random individuals that are not company employees during promotional and advertising activities
  • The company gives gifts to random individuals that are not company employees at annual parties, seminars and celebratory events
  • The company gives extra lucky-draw opportunities to customers with a certain level of loyalty

Every individual who receives gifts under the aforementioned circumstances will be liable for IIT payments, with the amount due standing at 20 percent of the received gift’s market price.

In addition, the Circular also listed the three situations when individuals are not subject to IIT payment:

  • The company sells discounted products or provides discounted services
  • The company provides free gifts when selling products/services to individuals
  • The company gives free gifts to compensate customers for their consumer mileage/points as part of the company’s consumer loyalty incentives

In introducing this measure, the tax bureau has shifted the onus on tax payments for the receipt of gifts associated with business from corporate responsibility to the individual recipient. The procedure to submit IIT to the tax bureau upon the receipt of gifts is to declare it on the monthly tax return. Penalties for failing to do so can invoke examination of assets and the imposition of fines of up to five times the tax due on the value of goods received. Corporate employees receiving gifts at corporate events should take note of the new regulations to ensure they do not fall out of compliance as most events of this type will have a pre-arranged guest list that can be easily scrutinized and individually followed up on by diligent officials.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. For advice, please email tax@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

This article is also available on Dezan Shira & Associates’ online business resource library. To view the article, and other regulatory updates, please click here.

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