Individual Income Tax Treatment for Annuity Contributions

Feb. 5 – The State Administration of Taxation’s Circular 694 advises on how to compute for individual income tax (IIT) for contributions made to company annuity plans set up by employers.

A corporate annuity plan is a supplementary pension funded by contributions from both employers and employees. It is a common practice in China practiced by local and foreign companies as a way to reward employees for long term performance.

Employees will contribute a maximum of 1/12 of their total remuneration of the preceding year while maximum remuneration from both the employer and employee is limited to 1/6 of total employee’s remuneration for the same period.

An employee’s contribution to a corporate annuity plan is not deductible when computing for the IIT. Overall, the circular gives the responsibility of withholding and reporting of IIT to the employer including managing employee contributions made to the annuity plan. This can pose a problem for companies with a high employee turnover rate because it adds more work for its HR and finance departments.

For more advice on complying with tax regulations in China email tax@dezshira.com.

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