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China introduces tax deductions for private pensions

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Lewis Lu of KPMG China discusses the new IIT deduction for private pensions and the updated catalogue of encouraged industries for foreign investment.

In 2022, the Chinese government has been seeking to encourage investment in private pensions. A long-anticipated individual income tax deduction for individual pension contributions was finally announced in November 2022.

The Ministry of Human Resources and Social Security, the State Taxation Administration (STA), and the Ministry of Finance (MOF) issued the relevant measures. An exemption-exemption-taxation (EET) system has been instituted, similar to the US 401K regime.

An IIT deduction can be claimed for private pension contributions of up to RMB 12,000 ($1,800) each year, with premiums payable on a one-off or on an instalment basis. Contributions will be accepted from participants in the state (basic) pension regime, which is funded with social security contributions (state and private pensions exist in parallel).

Amounts may be paid into qualified financial products (through dedicated personal pension accounts), including saving deposits, wealth management products, commercial endowment insurance, and publicly offered funds.

Contributions can be withdrawn where participants:

  • Reach the qualifying age for state (basic) pension withdrawal;

  • Completely lose the ability to work; or

  • Emigrate from China.

In parallel, in Announcement No. 34, the Chinese STA and MOF set out the IIT treatment over the private pension life cycle:

  • Premium contributions – premiums paid may be deducted from comprehensive income (to which IIT rates of 5–45% apply) or business income (to which a 35% rate applies). Claims can be made in the monthly or annual IIT filing.

  • Investment income – investment income accruing to an individual’s personal private pension account is IIT exempt.

  • Withdrawal of pensions – withdrawals will not be included in comprehensive income and instead be taxed separately at a lower rate of 3%. This provides for a rather generous EET model, as the tax on withdrawal is very low, though the deductible contribution limit itself is also quite low.

The IIT pensions deduction will be piloted in 36 cities and regions (such as Beijing, Shanghai, Guangzhou, Xi’an, and Chengdu) and be retroactively applied from January 2022.

In a previous article, KPMG China noted that an IIT scheme, similar to the newly announced one for private pensions, had been operating on a trial basis in Shanghai, Fuzhou, and Suzhou from 2018. This so-called commercial endowment insurance scheme also provided for EET treatment, but with a withdrawal rate of 7.5%. This will now be conformed to 3%.

Foreign direct investment

On the foreign direct investment front, China has released the new Catalogue of Encouraged Industries for Foreign Investment (the ‘2022 Encouraged Industries Catalogue’). This was issued by the National Development and Reform Commission and the Ministry of Commerce in October 2022 and is applicable from January 2023.

The 2022 Encouraged Industries Catalogue sits alongside ‘negative lists’ and other documents that steer foreign (and domestic private) investment into some sectors and away from others (which may be restricted or prohibited).

Inclusion of a sector in the 2022 Encouraged Industries Catalogue prompts local governments and other authorities to provide various incentives and preferential treatments, which can include:

  • Customs duty exemptions for the importation of self-used equipment;

  • A reduced corporate income tax rate at 15% in certain regions; and

  • Various local grants and subsidies.

The latest catalogue increases encouraged sectors to 1,474 from 1,235 in the 2020 catalogue.

The focus of the latest changes is to encourage more foreign investment in advanced manufacturing and services, green industries, and the central and western regions.

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