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CHINA: "The new factors driving growth in China's chemicals sector" report

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back to index backCHINAtalk March,  2005

Preferential taxation of bonus payments

The State Administration of Taxation recently changed the method of calculating tax on qualifying annual bonus payments.

Effective 1 January 2005, the tax on qualifying annual bonuses is to be calculated by applying the marginal tax rate applicable to one-twelfth of the bonus to the entire bonus; standard deductions also apply.

Qualifying annual bonuses must comprise payments for the "performance" (not defined) of the individual or the company; a merit increase may be considered as an annual bonus. Only one bonus qualifies for the preferential tax calculation. Any other periodic or extraordinary payments are now to be added to monthly compensation and taxed at the ordinary marginal rates in that month.

Previously, all bonuses were filed as a separately taxable item from salary and wages; marginal tax rates applied to the bonus

Taxpayers filing under the time-apportionment method may be able to continue with the old method of calculating tax on multiple bonus payments in a year.

While the circular is welcome guidance, it may be a challenge for companies with bonus programs allowing for multi-year performance cycle or shorter-term incentives such as semi-annual or quarterly bonuses. The circular is also ambiguous on the tax treatment of bonuses charged to a China permanent establishment in respect of non-residents frequently traveling to China.

Source: Deloitte China - GAI

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