Is there an alternative to the employer paying tax on the expatriate employee's grossed up income?
Yes there is in a form of a loan bonus. An employer makes a loan to cover the employee's individual tax bill and this loan is later restructured, waived or paid when the employee has completed his China posting. If the loan is to be repaid after an employee leaves PRC, other tax planning considerations come into play. It is important to consider whether the loan will be taxed in the employee's home country as well as whether it will be taxed in PRC where the employee receives the loan. In addition, there is a distinction between loans made by foreign-invested companies in China and those made by foreign shareholders outside the PRC. A foreign-invested enterprise should book such a loan as the waiver of such a loan may be considered additional China-sourced income on which the employee is liable for income tax in China.