A government circular (No. 103) issued on December 6, 2013, details important new tax incentives for enterprise annuity (EA) plans and occupational annuities. The aim is to encourage more people to save for their retirement – an urgent priority given China’s demographic structure.

Up to now, employer contributions in China to supplementary retirement EA plans have been taxable to the employee, and there have been no tax breaks for employee contributions or benefit payments. This has now changed, as of January 1, 2014.

 

 

New Rules

Under the new regulations:

  • Employee contributions of up to 4% of annual pay will be exempt from individual income tax (IIT). Annual pay for this purpose is capped at 300% of city average earnings for the previous year, as under social security
  • Investment returns (capital gains) will be exempt from IIT
  • Benefit payments will be subject to IIT as income, with tax payable on withdrawal at retirement
  • Employer contributions can be up to 8.33% of annual pay.

 

 

Impact on employers

While there are some details still outstanding, the impact on compensation and benefit plans will be enormous. The new tax incentives mean that a well-designed EA plan can become a valuable tool to attract and retain talent. Starting in 2014, employers can offer tax-favoured retirement benefits to employees, and employees will be able to save for retirement on a tax-deferred basis. As a result, many employers will want to explore using a total rewards approach to compensation, including overall benefits, retirement and taxation.

 

Industry growth

The overall effect on the industry should be similarly huge. In 2013, seven years after the EA was introduced, there were some 60,000 EA plans covering 20 million employees, representing less than 3% of the workforce, and just over 23% of Chinese companies. The amounts involved came to under 1% of GDP. The new rules will give an important boost to growing the employee benefits market in China, while helping to deal with the funding needs of China’s ageing population. 

 
Ping An
china life

For more information

please contact Swiss Life Network