Hiring local employees in China: Chinese Taxes and Social Insurances
Hiring local employees in China: Chinese Taxes and Social Insurances
Hiring local employees
Many foreign companies operate under the misconception that in order to hire local employees in China they can simply translate labor agreements from their home countries. This misconception can lead to a multitude of complications for the company, as foreign labor contracts do not account for Chinese regulations. Foreign labor contracts are also likely to lead to legal problems should a conflict arise between the company and any employees, as Chinese legal courts very rarely accept foreign contracts as binding. Moreover, such cases often leave the foreign company marked as not compliant which could result in future issues. This article aims to clarify some of the rules and regulations surrounding hiring local employees in China, specifically addressing Chinese taxes and social insurances, and the housing fund.
Before addressing the minutia of the issue, readers should note that any company wishing to hire in China must have already established an entity in the country. You can read more about getting your company started in China here.
Chinese Taxes and Social Insurances
The most important tax that employers have to take into account when hiring local employees in China is the Individual Income Tax (IIT). This tax is levied on a progressive rate, ranging from 3% for monthly taxable incomes of RMB 1,500 to 45% for monthly taxable incomes of RMB 80,000. The IIT is withheld from the employees’ monthly salary by their employers, and is paid directly to the Chinese government by employers. This withheld IIT is then paid to the tax authorities on a monthly basis.
Another significant portion of salaries in China is allocated to the social security system in China. This system is legislated at the federal level with the Social Insurance Law, and regulated by the Ministry of Human Resources and Social Security (MOHRSS). Portions of salaries set aside for social security cover five different types of insurance, namely pension, medical, unemployment, maternity, and work injury, listed in order of percentage significance. As with the IIT, social insurance payments are made on a monthly basis, and must be facilitated by a local Chinese bank that has been approved by the Chinese government.
Aside from saving money to pay for Chinese taxes and social insurances, companies must also reserve an amount for the Housing Fund. The Housing Fund was established in 1999 to help Chinese employees save money with the goal of purchasing their own homes. The Housing Fund is legislated at the national level with Regulations on Management of Housing Provident Fund, and regulated by the Ministry of Housing and Urban-Rural Development. Money withheld for the Housing Fund is not distributed nationally. Rather, it is placed directly into the employee’s personal Housing Fund. That being said, this fund is only accessible for down payment, purchase, construction, or renovation of a house, or to pay back a mortgage for a house. Recent reforms have slightly relaxed these regulations, allowing employees to access the fund for emergencies such as urgent medical treatment.
As the Housing Fund is regulated by a different department than that for the Chinese taxes and social insurances, employers must register their employees with this separate agency. Newly incorporated companies must register at the Housing Fund Bureau within 30 days of establishment, and within 20 days of registration the company must then work with a bank to automate their Housing Fund contribution payments. Additionally, the employer must register a new staff member with 30 days of their first day working for the company.
Comparison between Major Cities in China
Though all of the policies discussed above are legislated at the national level, tax rates for the employer vary between different cities in China. We’ve summarized some of these variances for several cities below:
|Pension (%)||Medical (%)||Unemployment (%)||Maternity (%)||Work Injury (%)||Housing Fund (%)|
Foreign vs. Chinese Employees
All employees working in China must pay for the Chinese taxes and social insurances, however there are some key differences between foreign employees and Chinese citizens. No matter how long they have resided in China, foreign individuals may also be taxed on salary income they have received globally in case they reside in China for more than 183 accumulative days in one calendar year. However, starting from the sixth year of residency in China the individual is considered a resident and becomes liable for income received globally for that tax year. Foreigners are eligible for a standard deduction of RMB 4,800.
Another way that foreigners are taxed differently from their Chinese counterparts is special allowances from the Chinese Tax Bureau. These include: allowances for housing and meals, relocation expenses upon commencement or cessation of employment in China, business travel expenses to the individual’s country of origin, and language training expenses. To receive these allowances, they must be included in the Chinese labor contract, and the employee must produce a fapiao, or official receipt monthly for any expenses.
Most cities in China require foreigners to participate in the social security system, as detailed in the 2011 policy Interim Measures for the Participation in Social Insurance of Foreigners Employed in China. However, there are some exceptions to this rule. Shanghai notably does not currently require any foreign employees to contribute their salaries toward social insurance. Additionally, the national government has negotiated deals with those of Germany, Korea, Denmark, Canada, Finland, Switzerland, the Netherlands, and Spain, that make expatriates from those countries eligible for exceptions across China. Similar deals have been made with France and Serbia, which will soon come into effect.
Finally, with regards to the third major policy that affects salaries in China, foreigners are completely exempt from Housing Fund withholdings, as the program is reserved exclusively for Chinese citizens.
China’s laws place a significant burden on employers to pay for Chinese taxes and social insurances, and also to pay housing fund contributions on behalf of their Chinese employees. This policy means that for each employee, a company might have an expenditure that is, in the case of cities like Beijing, almost double of the employee’s net salary. This should not discourage companies from expanding and hiring local employees in China, and we hope that this article will allow our readers and clients to be more informed when making decisions regarding hiring in China. It is vital to be compliant to the local rules and regulations and hiring though a WFOE, Joint Venture or local Chinese company is a must.
If you have any further questions about this topic, or how to take advantage of opportunities in China, please reach out to us at email@example.com.