Since the reform of July 1st 2011, there is a regulation that makes mandatory the payment of social security contributions. INS tells you everything about this text:
The Chinese government requires foreign workers to contribute to their social welfare.
The Law October 28, 2010 on Chinese social insurance plans to subjugate the foreign employee to Chinese social payroll effective July 1st, 2011, date of entry into force. This provision will increase the labor costs of foreign personnel and causes then questions within the business community, which employs some thousands of French expatriates working in China. This is the first time that the Chinese government publishes such a comprehensive law on the social security system. If this regulation keeps its gray areas, it is in itself a major political issue. But this magnitude has a cost for foreigners, since it is also the first national legislation to impose an obligation on foreign personnel to contribute to the Chinese social security scheme.
This Act is to establish the first universal and harmonized social insurance system at the national level for the pension plan, and at the provincial level for pension sickness, unemployment and accidents. So far, these systems are managed by municipalities, according to different rules. This splitting introduces a segmentation of the labor market – the burdens and benefits are different depending on whether the employee is a resident of the municipality or not. Harmonization, which is fraught with difficulties of implementation, is therefore welcome. Including migrant workers (mingong) can now benefit from a minimum social insurance system, especially since the reinforcement of the administration means in case of non-payment. Despite the injunction to stop any breach, the authorities may impose a late fee of 0.05% per day on the total amount due.
General framework of the social security system
– Old-age insurance;
– Health Insurance;
– Unemployment insurance;
– Working accident insurance;
– Maternity insurance. Please note that the contribution to the fund is mandatory for all employees regardless of their gender.
Section 97 of the Act, a minor provision regarding the object of the law but most crucial regarding foreign companies, makes compulsory the contribution of foreign employees by co-financing between them, their employers and the government – it was optional until now. The procedures must be applied through official texts, whose publication before July 1st was uncertain. The challenges are substantial: for example, the contribution existed since 2005 for nationals of Taiwan, Hong Kong and Macao; and it has never been applied: since 2005, these costs are accrued in the accounts of companies! Administrations in charge of this system require guidelines that enable them to apply this complex device; however, internal discussions are ongoing to define the circular application. In addition, despite the national framework of the new regime, local regulations are necessary to clarify certain terms (contribution rates, for example).
Clarification by the provisional measures related to the contribution of employee expatriates to the Chinese social security system, published June 10th, 2011
Regarding the questions raised by the regulation, the Ministry of Human Resources and Social Security has prepared interim measures to echo these questions and clarify certain sections of the law to respond:
– The contribution to social security is applicable to foreigners (including citizens of Hong Kong, Macao and Taiwan) working physically within the Chinese territory and having a work permit;
– If the foreign person then leaves the territory of China, his account can either be held until his return to China, is well fenced and has led to a refund of monies paid, subject to approval by the Chinese authorities after filing a folder. In case of death, the account may be transferred to heirs;
– For people whom country of origin signed a bilateral agreement on social security, which is not the case of France, they can obtain an easing of the measures prescribed by the law. The signing of an agreement on social insurance between France and China would avoid, at least in part, double coverage (based on the mutatis mutandis model tax convention, which avoids double taxation). Only Germany and South Korea, for the moment, negotiated and signed such an agreement. This solution and its modalities are currently being analyzed by the French authorities.
These measures described as provisional, are indeed applicable even if they should in the future be replaced by an enhanced text based on the experience gained with such provisional measures.
Anyway, employers must implement the insurance scheme which leads to a substantial increase in labor costs of expatriates, in addition with a set of additional taxes. This additional cost, which varies by province, is about 40% for the employer (in the limit of 5,000 RMB) and 20% for the employee (within the limit of 2,500 RMB), due to a monthly limit of 12,000 RMB. Benefits in return are modest: they include, for example, in terms of disease, an access to Chinese hospitals, which are still considered as unattractive. This could also lead, as mentioned above, the French nationals working in local contract to double social security contributions if they wish to purchase also as a personal insurance in France.
Latest information dated September 6th, 2011
A more recent text deals with remaining doubts on several uncertainties:
– It confirms once again, the obligation for persons outside to contribute to the social security system and gives a more explicit definition of “foreign persons” concerning then any foreigner legally employed in the territory of China whom have obtained a valid license work related to his function as well as his residence permit, regardless of whether their employer is in China or outside China;
– Employers are required to register their foreign employees within 30 days from the date of obtaining working permits;
– The date of entry into force of the interim measures is October 15th and the law will then be applied.
Therefore, this law may seem unfair because the contributions will not allow outsiders to perceive any benefit in the short term. It should be recalled that the principle of contribution to the social security of foreigners in the country of residence is a concept that exists in other countries, including France. And compared to other countries, this contribution remains low because contributions are capped and the limit is the same for foreigners and Chinese.
Finally, the sums paid as social security contributions are not subject to income tax and wage portion may be deducted from taxable monthly salary. In case of final return to France of the foreign person, it may request the refund of these amounts. It has not been mentioned of a tax for that.
The year 2011 has not only shaken the right to social security in China, it also had the personal tax revised to standardize on one hand the tax system among foreigners living in China and Chinese; and on the other hand to tax high wages more significantly.
INS Global Consulting, through its PEO services, keeps being updated on the latest possible changes in legislation and is committed to fulfill its mission in a legal way.
For more information about INS Global Consulting services: https://www.ins-globalconsulting.com/Services