Income-tax subsidies: what’s it all about?

Shenzhen has been generating waves of media attention since announcing that it will subsidize the income tax burden for “overseas talents” that choose to settle and work in the city. But there is more to this than meets the eye. It pays to understand what is happening at the national, provincial and local level.

First, one needs to understand that China is not like laissez-faire Hong Kong. It may have an economic system that is bestowed with Chinese characteristics, but it is a socialist system nevertheless – much like the United Kingdom’s. Top earners in the country pay up to 45% income tax, on par with those in the UK, Japan, and South Africa.

However, to attract top talents from overseas (including Hong Kong and Macau) to work in the Greater Bay Area, the Ministry of Finance has tossed the region a bone. On March 14 this year, it instructed the nine mainland GBA cities to subsidize the effective income tax paid by these desired talents in such a way as to bring it in line with Hong Kong’s income tax rate, currently set at an effective maximum of 15%. In other words, no tax rate is being changed. The city governments are supposed to reimburse income-tax payers the difference between what they would normally have to pay and the Hong Kong 15% threshold.

Below is a comparison between Hong Kong and the mainland’s effective income tax rates, and the difference a subsidy would make.

Monthly Salary in RMBHK income tax (effective tax rate)Mainland income tax (effective tax rate)Taxation difference to be subsidized
50,00011%18%7%
80,00013%24%11%
100,00014%28%14%
120,00015%30%15%
150,00015%33%18%
 Note: This is just a rough guide. It does not take into consideration deductibles other than basic annual allowances. Talk to an accountant before making a decision.

Right, then. Next question:

Where can I apply?

Good question.Even though the all-powerful Finance Ministry has instructed the GBA cities to do this, it has left the implementation work up to them. In effect, this means the rollout has been patchy, so far. Shenzhen has been quickest off the mark, first announcing the tax subsidies in its Qianhai special economic zone. Then the mayor must have decided to go more boldly forth, announcing the policy would apply to the entire city.

There is another reason why Qianhai went first, however. It’s the same reason Zhuhai’s Hengqin special economic zone was also a first-mover: because the Finance Ministry had previously blessed plans by the country’s national-level special economic zones to do this – waaaay back in 2014. Currently, only those already registered and working in Qianhai or Hengqin can apply for these preferential policies.

From what we can find, all nine of the GBA cities were placed on the same starting line, on March 14. That was when the Finance Ministry released a directive to the provincial government’s tax agencies (there are more than one), as well as the Shenzhen city government’s tax agencies (because they have a different reporting line), indicating:

Guangdong province and the city of Shenzhen will provide subsidies to those overseas (including Hong Kong, Macau and Taiwan) high-end and much-needed talents working in the Greater Bay Area based on the taxation difference between Hong Kong and mainland tax rate. These subsidies are exempted from personal income tax.

The definition of the overseas high-end and much-needed talents and execution details of their tax subsidies will follow the decisions of the Guangdong government and the city of Shenzhen.

To be clear: this covers all of the nine: Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing. It is effective for the whole of 2019, backdated to January 1, which means it will likely be assed and updated at the end of the year.

The devil, however, is in the details. The directive has left the decision on when to execute such tax preferential policies to the local governments, as well as how to define the criteria for applicants.

Yes, and what are the credentials for a “talent”?

Besides Shenzhen’s Qianhai and Zhuhai’s Hengqin, some time is likely going to be needed for the other cities to iron out the details of their own criteria lists. They might choose to follow Qianhai, which has the following applicable to “talents”:

Basic criteria:

  • Foreign passport holder;
  • Permanent resident of Hong Kong, Macau or Taiwan;
  • Hong Kong resident through Admission Schemes for Talent, Professionals and Entrepreneurs;
  • Mainland citizens residing permanently in Hong Kong or Macau;
  • Overseas Chinese who have obtained permanent overseas residency;
  • Overseas-educated Chinese returnees who have obtained permanent overseas residency.

Additional criteria (before submitting an application):

  • Must be working in a Qianhai-registered enterprise or organization, or be an independent business owner in Qianhai;
  • Must be a registered income-tax payer in Qianhai;
  • Must have continuously worked in Qianhai for 90 days during the application year;

Taxable threshold:above RMB300,000 (annually). In other words, you might be earning RMB1 million, but have lots of deductibles, which puts you into a tax bracket that assesses you owe RMB300,000; or you might be earning less than that, but have no deductibles, so your tax assessment is RMB300,000, too. It all depends on the individual’s situation.

Discretionary:“Overseas high-end talent recognized by the state, the provincial government or the city of Shenzhen; mid-level or above management or technical talents in Qianhai-registered enterprises.” In other words, there is hope here for the next Jack Ma.

There is absolutely no guarantee that the other cities will follow Qianhai’s lead, however. Hengqin, for instance, is more complicated.

If you’re Hong Kong or Macau permanent resident, and are already paying personal income tax in Hengqin, and you can prove you’re working in Hengqin … then you’re eligible for the preferential tax policies.

If you’re not, you won’t. However, Hengqin has also offered a number of other cash incentives to attract top talents, which we will explain in another article.