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Payroll & Tax in China

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China payroll & taxation

There are specific rules for payroll and taxation in China, depending upon whether your company employs foreign nationals or local Chinese employees. The primary concerns for a foreign company that needs to comply with tax laws in China include: Individual income tax (IIT) for employees in China, social security costs, payroll tax, sales tax, withholding tax, business tax and permanent establishment concerns.

China has some unique rules regarding employment, for example foreign nationals must pay local Tax and Health Insurance and also carry their own Health Insurance. Additionally employers of Chinese nationals must register and make contributions, which vary by region, to China’s social insurance system, known as the “Five Insurances,” plus a housing fund. The Five Insurances comprise a pension fund, medical insurance, industrial injury insurance, unemployment insurance and maternity insurance. For many companies using a local specialist payroll provider will simplify this process and ensure full compliance with local laws.

Your Payroll Options in China

Remote Payroll

A remote payroll in China is where a foreign company, i.e. a nonresident company, payrolls a resident employee in China. This is not possible in China. Under Chinese law only Chinese entities are allowed to have employees based in China. This applies to both local and foreign employees. The only option for a non resident company to payroll its employees (local and foreign) in China is to use a fully outsourced service like a GEO or FESCO (Foreign Enterprise Service Company which will employ and payroll the staff on their behalf.

Local Payroll Administration

In some cases, a company will register their business in China under one of the forms available, (RO, WFOE or JV) but prefer to have another company administer its payroll. This can be accomplished through a payroll provider. It is important to note that the company, as the Employer of Record, is still fully responsible for compliance with employment, immigration, tax and payroll regulations. But the payroll calculations, payments and filings can all be outsourced to the payroll provider

Internal Payroll

PLC

Larger companies with a commitment to China may wish to run their own local payroll for all employees, foreign and local. In order to accomplish this, they will have to complete incorporation, register the business and then hire the necessary staff. There will be a need for incountry human resources personnel who have the background needed to manage a Chinese payroll, and can fulfill all tax, withholding, and payroll requirements.

This approach carries significant cost and requires some knowledge of local employment and payroll regulations. The company will need a local accounting firm and potentially legal counsel to ensure full compliance with Chinese employment and tax laws.

Fully Outsourced Payroll & Employment

Companies can outsource the employment and payroll of their staff in China to a GEO, like Shield GEO. This is possible for both foreign workers and Chinese nationals. This is the easiest, fastest and safest way to payroll staff in China.

Shield GEO manages all aspects of payroll for workers in China, including taxes, withholding, social security payments and other statutory requirements. Shield GEO becomes the Employer of Record and employs the staff on behalf of the client.

Staff are paid monthly with tax and social security deducted at source and paid to local authorities. Shield GEO will invoice the client monthly in advance of the payroll date. The invoice consists of the Total Cost of Employment (Base salary + Employers Statutory Contributions + Additional statutory contributions) and a Management Fee. Shield GEO provides the employees with payslips.

Read more about outsourced payroll and employment through Shield GEO.

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Setting up payroll in China

Information Explanation
Currency ?

CNY Chinese Yuan

Employee Information Required ?

The employment contract absolutely has to contain:

  • Name, address & legal representative of the company
  • Name, address, ID number of the employee
  • Time limitation (if applicable) & probation period
  • Remuneration
  • Social insurance
  • Description and location of the employment
  • Regulations concerning working hour, rest & leaves
  • Working conditions, including safety & protection measures
Documentation Required for New Employees ?

A written labor contract is absolutely necessary in China in order to protect both the employee and employer. The law has special regulations on what happens if a written contract is not provided within a month after starting work. If this is the case, the employer has to pay double the salary for every month the employee worked without a contract. Furthermore, if the employee works for 1 year or more without any written contract, the contract then becomes an open-ended one.

Corporate Income Tax Rate

25%

Payroll Tax

N/A

Sales Tax

17%

Withholding Tax

10% for non-resident companies

Tax Figures

Information Explanation
Corporate Income Tax ?

25%

Income Tax Rate ?
Grossed income Tax Rate (%)
0 – 1,500 3
1,501 –4,500 10
4,501 – 9,000 20
9,001 – 35,000 25
35,001 – 55,000 30
55,001 – 80,000 35
Over 80,000 45

Expats are able to offset their taxable income with relevant business expenses

Payroll Tax ?

N/A

Sales Tax ?

17%

Withholding Tax ?

10% for non-resident companies

Employee Social Security (EE SS)

China has 8% employees contribution which covers pension, health insurance, maternity insurance, work related injury insurance and unemployment insurance. This varies by region.

Since 2011 expats are theoretically subject to employer and employee social security however many states are still yet to enforce this requirement

Employer Social Security (ER SS)

China has 20% employers social security contribution which covers pension, health insurance, maternity insurance, work related injury insurance and unemployment insurance. This varies by region and generally has a limit to the employer contribution where the maximum social security contribution cannot exceed three times the average monthly wage.

e.g. in Shanghai in 2012 the maximum
social insurance contribution was RMB 11689 per month because the average monthly wage was RMB 3896. Since 2011 expats are theoretically subject to employer and employee social security however many states are still yet to enforce this requirement

Payments

Information Explanation
Payment Mode ?

Usually paid monthly. Can be paid by bank or cash.

Frequency of Salary Payment ?

12 monthly payments

Invoice / Payslips required ?

It is not very clear but there are sources that are implying that payslips are required.

Minimum Wage ?

As of 1 June 2014, the highest monthly minimum wage was in Shanghai (1,820 yuan), closely followed by Shenzhen (1,808 yuan). The lowest minimum wage was in the south-western province of Guizhou (1,030 yuan).

Employment Termination

Information Explanation
Resignation / End of Service Payment ?

Non-competition period compensation
During the non-competition period the employee shall receive at least 30% of his/her previous salary per month. Previous salary means the average salary obtained during the last 12 months and this also includes bonuses or any other extra payments. The maximum time frame for the non-competition period is 2 years.
If the employer wishes to terminate the non-competition period before the official end, an additional three months compensation payment has to be paid.

Severance / Redundancy Pay ?

Severance pay also depends on whether it is termination with cause or termination without cause. If it is with cause, no severance pay is required. If it is without cause, severance pay is required.

Situations that require severance pay include termination due to restructuring, termination as a result of a mutual agreement or termination as a result of the expiration of a fixed-term labor contract. In case severance pay is required, employers are obliged to provide this amount to their employee in addition to other contractual arrangements that are in place. Any unlawful termination by the employer will result in reinstatement of employment or a punitive compensation equal to the doubled severance pay.

Severance pay is calculated at one-month salary for each year. Any working period of six months or above but less than one year must be counted as one year and for working periods less than six months, half a month’s salary must be paid as severance. For example, in case an employee worked for 13 months for the same company, he will receive severance pay that amounts to 1.5 month salary. The one-month salary is calculated – with certain limitations – at the employee’s average monthly salary during the last twelve months.

The formula for severance is one average month’s wages of the relevant employee for each year of service to the employer. For any period of service in this calculation that is less than six months, the employee is entitled to a half-month’s wages, while for any period of service between 6 months and one year, the employee is entitled to a full month’s wages.

Termination of Employment ?

If the employee is being terminated at the end of a fixed-term contract, no notice is needed. If the employee is not on a fixed-term contract, it depends if it is termination with cause or termination without cause. If it is with cause, no notice is required. If it is without cause, 30 days notice is required.

China

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