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The European Chamber of Commerce (EUCham) in China is advocating for the extension of tax exemptions on employee benefits, such as housing and children's education, to prevent a potential exodus of foreign talent. The tax breaks, announced by China at the end of 2018, were originally set to be phased out by the beginning of 2022. However, under pressure from multinational companies, the government decided in late 2021 to extend the exemptions for an additional two years.

The EUCham is concerned that the expiry of these exemptions could lead to significant financial burdens for foreign companies. Estimates suggest that a foreign company employing an expatriate with two children would have to pay an extra 800,000 yuan ($110,800) in taxes if the exemptions were eliminated.

Carlo Diego D'Andrea, Vice President of the EUCham in China and Chairman of its Shanghai chapter, warned that European companies may be forced to reduce their workforce in mainland China if the tax policy is not extended. He emphasized that "foreign investors would likely reconsider or significantly reduce the number of cross-border assignments to China due to the additional financial burden."

In May, the EUCham sent a letter to China's Ministry of Finance urging them to consider the chamber's recommendations. The Shanghai chapter of the chamber has also been engaging with local authorities, including the Shanghai Commission of Commerce, to seek timely updates on the tax policy.

The government had previously agreed to extend the transition period for the removal of the tax breaks until the end of 2023, following strong advocacy from multinational companies.

The potential loss of tax exemptions raises concerns about a "brain drain" in Shanghai, particularly after a two-month citywide lockdown in 2022. Many foreign professionals have already left the city, and there has been a significant decrease in the number of expats coming to work in Shanghai.

To retain foreign professionals and alleviate the tax burden on foreign companies and employees, the EUCham advises the Chinese government to address the matter promptly. The potential impact of losing non-taxable allowances on businesses is significant, with one in ten members of the EUCham already relocating or planning to relocate their Asian headquarters away from China, according to a business confidence survey conducted by the chamber.

During a visit to Europe, Chinese Premier Li Qiang emphasized the importance of cooperation and bilateral relations, acknowledging that a failure to cooperate poses the greatest risk to the global economy.

Retaining tax exemptions on employee benefits is crucial for attracting and retaining foreign talent in China. The EUCham's advocacy aims to ensure the continuation of these exemptions, which will not only benefit foreign companies but also maintain the connection between European headquarters and operations in China.

By fLEXI tEAM