Foreign Company Investigated for Abusing Tax Incentives on Expatriate Allowances, Ordered to Pay Over 28 Million Yuan in Back Taxes and Penalties!

H Company, a wholly foreign-owned enterprise based in Beijing, employs nearly 100 foreign staff in the city.

During an analysis of H Company’s tax-related data, the Beijing Municipal Tax Bureau discovered abnormally high pre-tax deductions for allowances in the company’s individual income tax (IIT) filings. Some foreign employees’ allowance amounts even exceeded 50% of their total income, prompting a tax audit.

Key Findings of the Investigation:

1. Overseas Education Expenses: H Company reimbursed tuition, registration fees, and other costs for foreign employees’ children attending schools abroad without withholding IIT. According to regulations, overseas education expenses are not eligible for tax exemption unless the education occurs within China. Additionally, non-educational expenses (e.g., meals, school buses) cannot be classified as tax-free allowances.

2. Non-Compliant Training Expenses: The company improperly deducted piano lessons, gym memberships, and other non-language training costs as tax-free allowances. Only reasonable language training expenses incurred within China qualify for tax exemption.

3. Family Visit Reimbursements: H Company reimbursed round-trip airfare for foreign employees’ family members without declaring or withholding IIT. Tax-free "family visit" allowances are strictly limited to two annual trips between the employee’s workplace in China and their family’s residence (spouse/parents). Reimbursements for family members’ travel violate this rule.

4. Expanded Housing Subsidies: The company included utilities, property management fees, and even housekeeping costs under tax-free "housing subsidies." Only direct housing expenses (e.g., rent) qualify for exemption; ancillary costs are non-compliant.

5. Fake Invoices for Training: A foreign employee submitted eight fake invoices from "B Consulting Company" to claim language training reimbursements. The tax bureau identified the fraud, resulting in an adjusted taxable income increase of 56,000 yuan.

Outcome:
The tax bureau confirmed that H Company had illegally expanded the scope of tax-free allowances (education, family visits, housing, training, etc.). The company was ordered to pay 16 million yuan in back taxes and an additional 12 million yuan penalty, totaling over 28 million yuan.

Dongjin Advisory’s Warning:
Tax authorities increasingly leverage big data systems to detect irregularities. Foreign companies must rigorously verify the authenticity and compliance of expatriate allowance claims (e.g., contracts, invoices, payment records). Misuse of tax incentives will lead to back taxes, penalties, and reputational damage.

Need guidance? Contact Dongjin Advisory for compliance support.

Mike Chang

Partner

mikechang@shanghaiinvest.com

• Added contextual explanations (e.g., “two annual trips”) to aid international readers.