Individual Income Tax and Social Insurance for foreigners employed in China
Issuing time:2019-03-01 00:00Source:Lehman Brown Accountant
For individuals to pay tax in China (PRC TaxResident), they need to be domiciled in China (Chinese national). A Non-PRC taxresident tends to be expatriates working in China, whose IIT is determined byapplicability of the tax treaty, length of their stay in the PRC (People’sRepublic of China) within a calendar year (or the tax year), as well as if thepayroll of the expatriate is borne or deemed as borne by a PRC entity and alsothe position and nature of duties performed by the expatriate.
An expatriate’s being domiciled in China isdefined by being a registered home owner with a personal residence in the PRCand usually or regularly resides in the PRC due to family relationship orbusiness relationship. The individual is liable to pay IIT on his or herworldwide income derived from sources in and out of China.
This consequently depends on the number of daysspent in the country and whether the income is paid by an PRC employer or itsPRC sourced income and borne or deemed as borne by an establishment in the PRC.For 90 days (or 183days, where treaty applies) or less spent in the PRC, onlyPRC-sourced income, paid by a PRC employer which is borne or deemed as borne bya PRC entity is subject to IIT. Between 90days (or 183 days where treatyapplies) to a year, only PRC-sourced income, irrespective of whom the paymentis made by, is subject to IIT. From a year to 5 years, the worldwide income,except the income relates to non-PRC services and is paid or borne by non-PRCentities is subject to IIT. If the stay exceeds 5 years, then the worldwideincome is subject to IIT.
These are income derived from PRC sourcesirrespective of where the payment is made from (in or out of China), includingincome from services rendered within China, employment (for example; wages,bonuses, allowances, subsidies, stock options and income related toindividual’s position), or the performance of a contract, etc. Also, incomefrom leasing of property for use in China, or assignment of properties, forexample, buildings, land use rights and more, located within China, as well asincome from granting licensing rights for use within China and income frominterest paid by companies, other economic organisations or individuals in China.
The IIT payable can be calculated by the belowformula:
A quick calculation method is used to simplifythe tax calculation. Individual income tax on wages and salaries is payable ona monthly basis. An individual is also entitled to a fixed monthly deductionfor expenses (for local staff RMB 3,500 and for expatriate- RMB 4,800).
Expatriates can take advantage of thenon-taxable benefits and the special tax calculation for bonus, break the fiveyear rule, arrange dual employment where applicable and have offshore serviceagreement.
An individual who has resided in China for 365days in a calendar year (or tax year) is deemed to have lived in China for afull year. However, absences such as, a (single) temporary absence from Chinaof less than 30days or multiple absences less than a total of 90days with acalendar year, are disregarded for the purposes of calculating the days ofresidence. Once the rule is established, the 6th year (if full year), theworldwide income will be subject to PRC IIT from the 6th year onwards, however,if the 6th year is not a full year (temporary absence not counted), PRC-sourcedincome in any particular year would be subject to PRC IIT.
On one hand, breaking the 5 years rule, beforethe 5 years residence is established, requires the individual to avoid residingin China continuously for 5 full years; therefore, by staying in China for morethan 30 days on a single trip or a collective period of more than 90 days in acalendar year, this can be established.
On the other hand, breaking the 5 years ruleafter the 5 years residence is established requires the individual to reside inChina for less than 90 days (or less than 183 days for treaty residents) in anyone year from the sixth year.
An individual can take advantage of thesebenefits, as certain types of reimbursement, i.e. housing reimbursement, mealand laundry expenses, home trip, language courses and education expenses in thePRC, relocation allowance, that are provided to an expatriate (and ofreasonable amount), on the reimbursement basis are not taxable.
For example, the annual bonus for the year 2013was RMB 80,000, (the amount determining the tax rate and QCD is RMB 80,000divide by 12 is RMB 6,667), the applicable tax rate is 20% and the QCD (quickcalculation deduction) is RMB 555, therefore, the IIT payable is:
RMB 80,000 multiplied by 20% subtracted by RMB555 is RMB 15,445.
This method can only be applied once per year.Furthermore, other bonuses are to be combined with wages and other types ofemployment income for the month, in order to determine the tax rate andcalculate the liability.
Service income from a consulting agreement istreated differently from an employment income under current PRC IIT regulation.Expatriates who are not undertaking the 5 years rule have no obligation toreport the non-employment income (company to company, or individual to company)sourced outside China to PRC tax authority. This is applicable to theindividual where there is existence of offshore duties and where there iscertain absence from China.
Commercial insurance benefits may not be taxableif the insurance premium cannot be distinguished in the name of an employee.Professional development allowance may not be taxable if the valid invoices canbe presented indicating the expenses are for education or professionaltraining. A cash card is offered to Chinese locals (not 100% cleat) and theycan utilize the annual bonus agreement.
If an expatriate is a senior manager, withpositions both in a company registered in China and the other out of China, wholives in China for more than 183 days but less than 5 years, works outsideChina for several days within a month and receives salary separately paid byhis PRC and non-PRC employers. Therefore his PRC IIT exemption is the portionof salary paid by his non-PRC employer for his working days outside China(includes working days and public holidays outside China), in relation to hisnon-PRC position, this is subject to conditions. The 5 years rule is stillundergoing discussions.
Mr. A, a foreigner, is appointed as General Manager with a Beijing WFOE and at the same time taking employment positionwith the Beijing WFOE’s overseas headquarters in the United States. Bothpositions will be under employment agreements;
Mr. A is expected to spend 40% of his timeabroad and the remaining 60% of his time staying within China;
Base sallary for the China onshore position withthe Beijing WFOE will be RMB 50,000 and for the offshore position will also beRMB 50,000. This gives Mr. A an income of RMB 100,000 per month.
The publication of the China Social Security Law(the SS Law) was made in October 2010, which by July 2011, it became effective.In addition, the draft of “Provisional Measures of Participation in SocialInsurance by foreign employees in China” (the Provisional Measure) was releasedfor public consultation on the 10th of June 2011, which in effect states thatthe participation of foreign employees is a mandatory requirement. As of the6th of September 2011, the finalized Provisional Measure was realised and tookeffect on the 15th of October 2011. To date, only Beijing has implementedcollection of welfare, (central Beijing, outlying regions are less strict andstill reviewing procedures).
Non-Chinese personnel legally employed in Chinawith a working permit, foreigner employment permit, foreign expert permit,foreign correspondent permit and permanent residence certificate for foreigners(Chinese green card).
There are two types of employment relationships; they include Local Employment, which consist of foreign personnel who are employed directly by Chinese companies, and Foreign Employment with a Chinasecondment agreement, assigning foreign personnel to work in their Chinesesubsidiaries, branch offices or representative office (RO).
Enterprises including RO or Branch office inChina held by a foreign company, or public institution, foundation or law firm,accounting firms, non-governmental organisation and many more, which areproperly registered under the domestic laws in China.
The Chinese residents or region signedbilateral, and under the protection of the Totalisation Agreements with China,are relieved from the obligation. At present, Germany (for pension andunemployment) and South Korea (pension) are in the agreement with China, whilstother countries, for example, France, are starting discussions.
This consists of the ‘five insurances’, they arebasic; pension and medical insurance, work-related injury insurance,unemployment insurance, and maternity insurance. However, housing funds are notincluded, but for Chinese personnel it is.
In the “Provisional Measure”, the contributionrates and basis is not specified, as cap salary and the contribution rates varyfrom place to place. These are still being calculated (also applies to Chinesepersonnel). The monthly contribution basis is the individual’s actual salaryand capped at 3 times more of the average municipal monthly salary of the localplace, (this is announced annually by the government), as well as bottomed at60% of the average municipal salary. In 2014, the combination of employer andemployee contribution is around RMB 7,350 (Beijing) and RMB 6,870 (Shanghai)per month.
Officially, a foreigner and a Chinese local areentitled to the same benefits. There are no clarifications on how to claimthese benefits or any details of them except for pension. For pension, theindividual is allowed to withdraw the contribution, with written applicationfor termination upon departure from China. An individual Contribution accountis allowed to be preserved if foreigner is leaving China. In addition, Years ofcontribution (15years or more) is allowed to be accumulated when the foreignerreturns and continues to participate. Furthermore, pension benefits can beclaimed at the qualified age (male 60, female 55) however, if the individual isliving overseas, documentation proving their physical existence must beprovided on an annual basis. In the event of death, the balance of theforeigner’s social security account can be inherited.
There is no formal clarification, so they followthe same rules as is applied to Chinese nationals (for personal contribution,tax is deducted, but employer’s contribution is not taxable (within specifiedlimit)). Presently, it is uncertain if the balance of a foreigner, upondeparture, is taxable or not. The obligation arises when employment commencedate was after the 15th of October 2011 and for existing foreign employees,between the 1st of July and the 15th of October 2011 (Beijing).
An employer must register foreign employees tothe security program, under his/her name, as an individual is not allowed to beregistered in their own name. The registration must take place within 30daysafter applying for a working permit for the foreign employee. A unique andpermanent social security number is assigned to the foreign employee as well asa social security card. In Beijing (cities and rural districts), retrospectivepayments have been implemented, whilst Tianjin is currently reviewing theirimplementation plans.
The payment system follows the practice appliedto Chines nationals. Foreign employees are to pay via withholding system oftheir employer on or before the 15th of every month. However, actual paymentsvia auto debit are around the 20th of each month. Furthermore, if the employerfails to register their foreign employees, they are subject to a fineequivalent to 1-3times more than the owing social insurance contribution. Thosedirectly responsible for the incompliance may be subject to a fine of RMB500 –RMB3,000. Also, a fine is imposed on late payments or underpayment ofcontribution (interest charge (0.05% per day) plus fine).
Expatriates aged 46 or over would be short ofthe 15years of contribution record to enjoy the pension benefits, thereforethere are discussions for raising the retirement age (male 65, female 60). Itis difficult for expatriates over 60years to obtain a working Visa in China.Expatriates can receive overseas as long as they are still living but noannouncement has been made about re foreign currency.
Expatriates are to register with 4 hospitals, itcan be any within the list (usually a First class or one closer to yourlocation), as they can claim at any first class, if visited or wherever theyhave registered. There are 19 first class and traditional facilities inBeijing. The first RMB 1,800 is excluded, and then 70% is taken off of the bill(first class) and 90% (3rd class). For an in-patient, the first RMB 1,300 isexcluded. When travelling, expatriates need to get “Emergency” on theirreceipt, and be at a covered hospital. They would need to pay first and bereimbursed later. A health card, which was issued in Beijing in 2012, is to beobtained. If registered for health welfare, the Beijing Commercial Bank willdeposit 2.8% from the payment baseline (under 35, (for example, an expatriatepaid base on RMB 17,379 per month, will get 17, 379 per month, will get17,379*0.028)), 3% (35-45) and 3.5% (over 45) refund in their bank accountevery month or withdrawal.
There are no announcements at present forexpatriates, in terms of Work related injury, maternity and unemployment. Aforeigner cannot be unemployed when they have a work visa. In addition, morecountries are expected to conclude a totalisation agreement with China. TheImpact on foreign employees will be better protection of rights and interestsin certain cases, however, for majority of the foreign employees, there will benegative impact from a cash flow perspective and junior expatriate employeesbecome less competitive due to cost consideratiion.