As of 15 October 2011, all expats in China are formally required to participate in China’s social insurance policy. In this article, Kristie Tien gives an in-depth insight into the new policy, as well as the impact it has on all foreigners living and working in China.
Introduction and background
China’s new social insurance policy came into effect through the Social Insurance Law (effective as of 1 July 2011) and the Interim Measures on the Social Security System for Expatriates (effective as of 15 October 2011). Together these regulations form the backbone of the “New Policy” for expats, although further implementing measures and guidelines are still required.
Under the New Policy, all expatriates are now allowed to receive social insurance benefits similar to those for Chinese citizens (with the exception of housing funds). They will consequently need to pay social insurance premiums. The New Policy comprises five separate funds, including pension, medical care, work-related injury, unemployment and maternity insurance.
Previously, similar social insurance contributions for expats existed in certain provinces but these were either optional (Shanghai), or compulsory for only certain kinds (Beijing). The New Policy therefore has great implications for expats and their employers in China; the expatriates’ take-home monthly pay will shrink because part of their wages will be put into social insurance funds, and their employers’ costs will increase considerably.
The term expatriate comprises all foreigners who work in China and hold a working permit. It includes expats employed by Chinese and overseas-funded companies, social groups, law firms and foundations that register in China, as well as those foreigners assigned to China on secondment by overseas-registered companies. It also includes expats working for branches and representative offices.
Exemption for Germans and South Koreans
Expats whose home countries have executed an agreement or treaty with China can, under certain conditions, be partly exempted from participation. At this moment only Germany and South Korea have made use of this opportunity.
Implementation – Beijing first
In order for the New Policy to be made applicable, implementation rules need to be taken on a local level. Beijing has so far been the only province/region to have taken this step by making public the “The Notice of Social Security for Expatriates in Beijing” (the “Beijing Notice”), which came into effect on 15 October as well. The Beijing Notice gives instructions to employers on how to implement the New Policy by deducting the social insurance contributions from the employees’ monthly salaries. It obliges the employer to download the “Social Insurance Administration Software” and to register each expatriate in a local Social Insurance Administration Centre, bringing a number of documents such as the employees passport, his/her Employment Permit, Residence Permit, registration form and a photo.
Expats in Beijing are therefore the first to be affected by the New Policy. Although we cannot say for certain, we expect that regions with large expat communities – like Shanghai – will follow Beijing and issue similar implementation rules shortly.
The social insurance rates differ from province to province. In major cities like Shanghai and Beijing, the rate could add up to approximately half of the employee’s income, and will be jointly paid by the employer and employee. However, as the rates are subject to caps, most of the contributions will be kept artificially lower. The caps will be adjusted on a yearly basis.
– rate could add up to 44,8% of the employee’s monthly income – which will be jointly paid by the company (32.5 to 34.3%) and employee (10.5% + RMB 3)- monthly salary is subject to a cap of RMB 12,603
– this would mean that most employers pay maximum RMB 4,323, whereas the employees pay maximum RMB 1326 per month.
– rate could add up to 48% of the employee’s monthly income – which will be jointly paid by the company (37%) and employee (11%) – monthly salary is subject to a cap of RMB 11,6881
– this would mean that most employers pay maximum RMB 4,325, whereas the employees pay maximum RMB 1,286 per month.
Penalty for non-compliance
If the employer fails to complete social security registration and no correction is made within the time frame stipulated by the relevant authorities, the employer shall be subject to a fine of one to three times the amount of the contribution payable. In addition, the executives and relevant personnel directly responsible shall be fined between RMB 500 to 3,000. Lastly, employers shall be subject to an “overdue fine” in case of late payment, which amounts to 0.05% of the contribution payable per day of late payment.
Objections to the policy
Many questions about the usefulness to foreigners of participating in the New Policy have been raised. Expats will pay high premiums, but shall not likely enjoy the full benefits. Some argue that at least seconded employees should be allowed to opt-out since they remain employed by a foreign company and are unlikely to enjoy the benefits from the scheme. Others argue that all expatriates should be able to opt-out of medical insurance if they are otherwise covered and that they should not have to contribute to unemployment insurance, for the simple reason that once unemployed, their visa becomes invalid and they cannot remain in China.
Expats in Beijing are currently required to participate in the New Policy and it is inevitable that expats in other major cities like Shanghai will follow shortly.
Companies employing expats (including representative offices) should start reserving cash in order to comply with the financial obligations under the New Policy. Companies in Beijing should pay particular attention, as application for them works back to 15 October. Moreover, those persons affected by the New Policy should contact their embassies and inform them of the financial burden it is bringing them. Requests should be made to start negotiation the terms of exemption treaties.
There are possibilities to restructure the employment of expat staff so that the New Policy does not apply to them. These depend on the specific circumstances of the persons and enterprises involved.
HIL International Lawyers & Advisers has an excellent team of employment lawyers with profound experience in advising on social security compliance issues in China. We would be delighted to assess your situation and provide advice on whether and how the unnecessary application of the New Policy can be avoided.
1. as implementation rules in Shanghai have not been issued yet, we cannot say for certain that these details are correct. The rates are based on those applicable to Chinese nationals with Shanghai Hukou (registered permanent residence)
For a full review of the special, please click Special – Social Security Expats