When sending employees abroad, structuring the compensation package is often one of the first issues
raised. The wide range of tax-free allowances that various countries offer allows companies to use creativity when creating expat salary packages. By taking advantage of these allowances, companies can effectively raise employee compensation by reducing their tax liabilities.
While the scope of tax-free allowances is different in each country, this article will review the current regulations in China, India, and Vietnam to give you an idea of the different options spread across Asia. Collectively, the three countries represent regimes ranging from allowance friendly to barely any allowances at all.
Tax-Free Allowances in China
In China, foreign employees are allowed to deduct certain allowances before calculating their income tax burden on their local monthly salary. There is no hard limit on how much employees may receive in tax-free allowances as part of their overall compensation package. However, in practice many companies aim for around 30% of the salary as a reasonable tax-free allowance. In addition, to be eligible to deduct allowances from an individual’s tax liability, two conditions must be met:
- The employment contract must stipulate the amount of the allowance and
- Each month the employee must produce an official receipt, which is called a fa piao in China.
Relocation expenses are tax-free for the foreign employee when moving to and leaving China. Companies can also give employees two personal trips to the employee’s country of origin per year. This allowance only covers transportation and not expenses such as hotels or meals. Reasonable business travel is also tax-free.
Apartment rent can also be deducted. If living in a serviced apartment, then there is usually no problem receiving a fa piao
for the rent paid, as the management company will be experienced in this area. However, if your employees choose to live in a non-serviced apartment, we recommend that they negotiate the production of fa piaos
into the lease. Some landlords may want to avoid giving out a fa piao
because then they must pay a percentage of the rent to the local tax bureau.
China also allows tax-free allowances for such items as meals, laundry, language training, and children’s education expenses, so long as these costs are reasonable.
One key wrinkle in Chinese law is that a cash allowance paid to cover a work-related expenditure such as entertainment or travel is fully taxable to an employee, whereas a reimbursement is not.
Tax-Free Allowances in India
India’s individual income tax regime is much stricter on tax-free allowances when compared with China. There are some limited deductions, but most perks added to a salary package are treated as perquisites or allowances, which are taxed differently.
Perquisites: A perquisite is any benefit received on top of an employee’s salary and increases taxable income. The taxable value of a perquisite is the cost to the employer. Perquisites include benefits such as utilities, domestic help, meals, and club memberships.
However, a small subset of perquisites is exempt from tax. This includes the provision of medical facilities and mobile phones used for business purposes.
Allowances: An allowance is a defined sum of money given on a regular basis to employees, in addition to their salary, to meet specific requirements. Like perquisites, allowances increase taxable income. Examples of allowances are apartment rent and children’s education expenses.
As opposed to perquisites, allowances do have a small exemption amount. For children’s education expenses, the exemption is up to Rs. 100 per month for up to two children.
As an added benefit, some allowances are fully exempt, so long as the employee incurs the actual expenses. One example of a full exemption is expenses from the performance of an employee’s duties.
Tax-Free Allowances in Vietnam
The Vietnamese income tax regime is similar to China’s and more favorable to foreign employees than India’s laws and regulations.
Like China, Vietnam allows for relocation expenses for foreign employees moving to Vietnam for employment. The allowance amount must be stipulated in the employment contract or previously agreed upon by the parties. Vietnam also provides for foreign employees to receive round-trip airfare to their country of origin. However, Vietnam only allows for one tax-exempt trip per year, not two like China. School fees and tuition for children’s education expenses are also exempted from taxation, if included in the labor contract.
The next set of exemptions is conditional and not automatically exempt. Transportation to and from work is exempt, but only if that means of transportation is provided for a group of employees. If the transportation is for an individual employee, then it is considered taxable income. A similar standard is set for membership fees for gyms and club memberships, healthcare services, and entertainment. If the membership card specifies names or groups of individuals, then it is taxable income to an individual. However, if the membership is of common use to employees, then it is not taxable.
Vietnam also has a special rule for housing allowances. The exemption for a housing allowance is limited to 15% of the total salary for the foreign employee; any amount of the housing allowance above that 15% limit is considered taxable.
In summation, China, India, and Vietnam provide a look at the different options available to foreign employees. These examples show the importance of understanding the local law and how it will affect your employees. The differences can have a great impact upon the after-tax pay of your employees. When exploring expanding operations, it is important to keep these regulations in mind because salaries will necessarily depend upon the local law.
Since its establishment in 1992, Dezan Shira & Associates has been guiding American investors through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, including liaison offices in Boston and Waltham specifically established to support our American clients, we are your reliable partner for business expansion in Asia and beyond. For inquiries, please email us at [email protected]. For further information about our firm and how we can support American investors in Asia, please visit our North American Desk