European Chamber of Commerce urges Beijing to extend expat employee tax breaks for housing, education amid fears of exodus of talent

It is estimated that a foreign company would pay an extra US$110,800 in taxes for a foreign employee with two children if the exemptions were scrapped
‘The Chinese government is advised to address the matter as early as possible to retain foreign professionals,’ says recruitment consultant

China's border reopening

Daniel Renin Shanghai

Published: 11:26am, 10 Jul 2023

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The European Chamber of Commerce (EUCham) in China is lobbying Beijing to extend tax exemptions on a range of employee benefits such as housing and children’s education amid fears their expiry could exacerbate an exodus of foreign talent.

At the end of 2018, China announced that tax breaks for certain expatriate allowances would be phased out by the beginning of 2022. Under pressure from multinational companies, the government made a last-minute decision in late 2021 to extend the exemptions for two more years.

It is estimated that a foreign company would have to pay an extra 800,000 yuan (US$110,800) in taxes for a foreign employee with two children if the exemptions were scrapped.

Some European companies may choose to reduce their headcount in mainland China if Beijing refuses to retain the policy, according to Carlo Diego D’Andrea, vice-president of the EUCham in China and chairman of its Shanghai chapter.

“As the extension will expire at the end of this year, the European Chamber has continued to advocate for the continuation of this policy at both a central and local level,” he told the Post. “Foreign investors would likely reconsider or significantly reduce the number of cross-border assignments to China due to the additional financial burden.”

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He said the business lobby group had sent a letter to China’s Ministry of Finance in May, urging it to consider the EUCham’s recommendations.

The chamber’s Shanghai chapter has also urged local authorities to provide timely updates on the tax policy during several meetings with the Shanghai Commission of Commerce between in recent months, D’Andrea said.

At the end of 2021, the government agreed to extend the transition period for the removal of the tax breaks to the end of 2023, after multinational companies strongly advocated for a continuation of the policy.

In April 2021, more than a third of multinational firms in Shanghai said they were considering moving all or part of their operations out of China in the event that the non-taxable allowances were scrapped.

“The reduction in foreign nationals may result in an increasing disconnect between companies’ European headquarters and China operations, in addition to potentially impacting the investment strategy of companies in China that require experienced executives on the ground,” said D’Andrea.

A business confidence survey by the EUCham that was released in June found that one in every 10 members had already relocated or planned to relocate their Asian headquarters away from China.

During a visit to Europe last month, Chinese Premier Li Qiang told business leaders in Germany that a failure to cooperate is the greatest risk to the global economy, in an apparent effort to promote economic and other bilateral relations with the continent.

Shanghai has been facing a “brain drain” since it imposed a two-month citywide Covid-19 lockdown in April and May of 2022. Hundreds of foreign professionals have left the mainland’s commercial and financial hub while the number of expats coming to work in the city has decreased dramatically, said Hong Lingyun, a senior executive with recruitment services firm Joinlink Consulting in Shanghai.

“The tax burden on foreign companies or employees will be huge if a further extension [of the tax exemption] is not implemented,” said Hong. “The Chinese government is advised to address the matter as early as possible to retain foreign professionals.”