China Global Payroll and Tax Information Guide
The socialist market economy of the People’s Republic of China is the world’s second largest economy by nominal GDP and the world’s largest economy by purchasing power parity.
China makes and sells more manufacturing goods than any other country on the planet. The range of Chinese goods includes iron, steel, aluminum, textiles, cement, chemicals, toys, electronics, rail cars, ships, aircraft and many other products.
With a population of 1.41 billion, China population is equivalent to 18.41% of the total world population.
China’s currency is the renminbi, also known as the Chinese yuan (CNY).
One key piece of executing business successfully is managing payroll in China in line with the country’s complex payroll laws, tax requirements and employment considerations.
Detailed below are other points companies should consider when setting up in China from a Global Payroll Perspective.
WHAT’S NEW IN china PAYROLL
- On 23 July 2018 a ‘Reform Plan on the National and Local Taxation Collection and Management System’ was released.
- Amendments to the Individual Income Tax Law of the People’s Republic of China were passed on 31 August 2018. The new law makes changes to many elements of the calculation and enforcement of IIT in China — focusing on expanding deductibles, adjusting tax brackets, and changing residency rules. The changes deliver tax relief for low and middle-income earners and the elderly, while creating a more robust regime for higher-earners and foreign employees.
- New tax calculation methods came into effect on 1 October 2018, while the remaining amendments were introduced on 1 January 2019.
BASIC FACTS ON PAYROLL IN china
There are 33 first-order administrative divisions of China, of which 31 generally are governed by Chinese law and have authority within the context of Chinese law to establish some elements of social tax policy and minimum wages, and of which two (Hong Kong and Macau) are special administrative regions that have autonomy to such an extent that general Chinese laws related to payroll typically are inapplicable for them and they instead enforce their own laws related to payroll.
There are specific rules for payroll and taxation in China, depending upon whether the 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.
Foreign workers in China are taxed separately from Chinese citizens for income taxes, generally are liable for most social insurance contributions, and are exempt from many labor-related requirements. Multinational employers paying the salary and benefits of dispatched employees through home country payrolls fall under China’s corporate tax laws under certain circumstances.
Tax records generally must be kept for a minimum of three to five years.
The financial year in China is from January 1st through December 31st.
The standard tax rate is 25 percent, but the tax rate could be reduced to 15 percent for qualified enterprises which are engaged in industries encouraged by the China government (e.g. New/high Tech Enterprises and certain integrated circuits production enterprises).
Resident individuals generally pay tax on their worldwide income, with any double taxation addressed with foreign tax offsets.
Monthly tax is calculated as follows:
Monthly taxable income x Tax Rate – Quick Deduction
* Expats are able to offset their taxable income with relevant business expenses.
Replacing the previous 5 year rule, foreign employees will now be considered tax residents, and subject to income tax on their worldwide income, if they reside in China for 183 days.
In China, the payroll tax is a specific tax which is paid to provinces and territories by employers, not by employees. The tax is deducted from the worker’s pay. The Chinese Government itself requires only one tax to be withheld from paychecks: the PAYG (or pay-as-you-go) tax, which includes medicare levies and insurances.
The standard rate of VAT in China is 17 percent. VAT is imposed on sale and import of goods and supply of certain services. There is a reduced rate of 13 percent that applies to products such as books and types of oils.
Withholding income tax on payments to non-resident companies – a concessionary rate of 10 percent is currently applicable to interest, rental, royalty and other passive income.
- Employee Social Security
China has 8% employees’ contribution which covers pension, health insurance, maternity insurance, work related injury insurance and unemployment insurance. This varies by region.
- Employer Social Security
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.
Under the law, employers must provide their employees, including expatriate employees possessing work permits, with five types of social insurance benefits:
- pension insurance
- health insurance
- occupational injury insurance
- unemployment insurance
- maternity insurance
In addition, employers and employees are required to contribute to housing funds, administered on a provincial basis.
STATE/ JURISDICTIONAL TAXES
Cities generally have primary responsibility for administering income and social taxes, and can apply additional payroll taxes to fund various allowances for workers, such as a surcharges for heating in the northern areas or factors that account for excess heat in the southern areas.
COMPENSATION AND BENEFITS
China’s Labor Law provides legal requirements for minimum wage, labor contracts and collective bargaining, in addition to social insurance.
Minimum Wage: There is no national minimum wage rate in China.
Overtime: Overtime pay in China has two key components: an hourly amount determined by hours worked each day beyond the standard, and the premium amount of pay determined by the type of day on which the overtime occurred.
In general, employers can only require workers to work up to three hours more in a workday as overtime, up to a maximum of 36 hours overtime in any single month.
The hourly rate of pay for overtime work on weekdays is 150 percent of base pay. Overtime work on a weekend increases that premium to 200 percent of base pay, and a 300 percent premium is paid for overtime worked on a holiday.
Hours of Work: An eight-hour day is the norm, 40 hours per week. Employees receive at least one full day of rest during the week, although most employers provide two days, usually Saturday and Sunday.
Holidays: The holiday schedule features two major week-long holidays: the Spring Festival (also known as Chinese New Year) and National Day. In 2019, the Spring Festival falls between February 4 and 10, and the National Day holiday between October 1 and 7.
Foreign human resource managers should note that Saturdays and Sundays are often marked as additional official work days in China to compensate for long holiday breaks.
Private companies in China, however, have the right to determine their own schedules – that is allow for additional days off – so long as the official holiday calendar is maintained.
Leave: Full-time employees working at least one year are entitled to five days paid annual leave each year. Employers that desire to cancel annual leave because of production or work requirements must first get the consent of the workers and then must pay 300 percent of each employee’s daily wage for each day of annual leave accrued but unused.
- Sick leave: When an employee suffers a non-work-related illness or injury the length of the sick leave entitlement depends on total years of work experience and tenure with the current employer:
An employee on sick leave is entitled to compensation, the amount of which varies by location.
- Paid parental leave: Female employees are entitled to maternity leave of at least 98 days, beginning 15 days prior to the expected date of delivery. Maternity leave is extended by an additional 15 days if a woman undergoes a difficult labor and delivery. In cases of multiple births women get an additional 15-day period of maternity leave for each additional child. If a woman gives birth to her first child at age 24 or older she is entitled to additional maternity leave, the length of which varies depending on locality.
Paternity leave is granted to the father for three to 30 days depending on locality.
- Home leave: Home leave is only required for employees who work for the government, state-owned enterprises and social institutes. Foreign-owned enterprises may grant home leave or not, as management chooses.
Wage Payment: Usually paid monthly. Can be paid by bank or cash.
Bonuses and Special Benefits: Many companies in China have instituted a 13th month salary payment.
Termination Pay: 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 with cause, no notice is required. If it is without cause, 30 days’ notice is required.
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.
FOREIGN WORKERS IN china
Foreigners living in China must file with the local tax authorities for tax registration. Foreigners working or providing services in more than one local tax jurisdiction may file and pay taxes separately in each jurisdiction, or apply to the local tax authorities to pay monthly all individual taxes due on a consolidated basis at just one location.
Multinational employers may fall under coverage as a taxable establishment and place (E&P) or a permanent establishment (PE) in China if the home entity carries out the employee’s performance reviews and bears all or part of the responsibilities and risks associated with the employee’s work.
Foreign workers seconded to China and paid from the home country may create this tax nexus for their firms under the following circumstances:
- The Chinese host company pays management or service fees to the home company.
- The payments from the Chinese host to the home entity exceed the employee’s total wages and expenses.
- The home company keeps some of the payment received from the Chinese host instead of passing it all to the dispatched employee.
- The China individual income tax (IIT) for the employee is paid in full on wages received from the home entity.
- The home entity has the authority to decide the number, qualifications, salaries, and working locations of employees dispatched to China.
Visas: The F Visas can be obtained by visitors who have noncommercial purposes only. The M visa has been introduced for foreigners coming to China for business purposes. Work visas, covered by both Z and R visas, are issued to a foreigners for the purpose of commercial performances or academic exchanges and to their accompanying spouse and minor children.
In order to reside lawfully within China for more than one year a non-Chinese national must obtain a residency visa. Permanent resident visas (D Visas) are issued to foreigners authorized to reside permanently in China.
Taxes: Foreigners who have a residence or reside on the Chinese mainland for more than 183 days a calendar year will be classified as resident taxpayers, subject to Chinese tax on their worldwide income, according to the revised Individual Income Tax Law.
Those residing on the Chinese mainland for less than 183 days a year will be considered nonresident taxpayers, liable for tax only on their onshore income, according to the revised personal income tax code that took effect in 2019.
Under current law, foreigners who reside on the Chinese mainland for more than one year but less than five years should pay tax on their onshore income and only the offshore income that’s derived from onshore entities or individuals. In other words, they don’t have to pay tax on offshore income from offshore sources. Those who reside on the mainland for more than five years are required to pay taxes on both onshore and offshore income, no matter the source. This is also known as the “five-year rule.”
China has entered into more than 90 income tax treaties, including an income tax treaty with the United States.
China’s bilateral income tax treaty with Cambodia takes effect January 1st, 2019.
China additionally has an income tax treaty in effect with Taiwan (the Republic of China) and additionally has income tax treaties in effect between its main part and its two special administrative regions: Hong Kong and Macau. These treaties affect taxation of individuals who may have presence in some form in the special administrative regions or in the main part of China.
China does not have a totalization agreement with the United States for social tax coverage purposes.
To learn more about payroll in China and for further information on Payslip’s international payroll services contact us today!
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