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Pay your team in China
Setting up payroll in China
Income tax and social security in China
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In the 2021 Global Payroll Complexity Index, China ranked as the 14th most complex country when it comes to processing payroll, and the Global Payroll Management Institute’s “Getting the World Paid” survey of the same year also saw China voted among the countries where payroll processing was perceived as very challenging.
There are several aspects that make processing payroll in China more difficult than in other countries, one of them being the high level of regional variation. Social security contribution rates and caps, registration requirements, minimum wages and other factors influencing payroll processing differ from province to province. Not to forget the system of additional workdays the government has introduced to compensate for the country’s several multi-day cultural celebrations which also add to the complexity of payroll in China.
The complexities of processing payroll start with incorporation, which is a necessary requirement to be able to hire employees in China. In order to conduct revenue-generating business and act as a legal employer, it is necessary for businesses to create a wholly foreign-owned enterprise.
The necessary registrations for businesses entering China and employing local employees include:
Application for a business license
Registration for local and state tax (to be done with the respective local and state tax authority) and, if necessary, registration of foreign national employees for personal income tax
Registration for social security with the social security authority of the respective city – to be concluded within 30 days after receiving the business license
Registration with the local housing fund administration
Employers further have to register new hires with the local social security authority as well as with the local housing fund to be able to make the mandatory contributions. A local bank account is necessary to make payments to employees and authorities.
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In 2018, China amended its Individual Income Tax (IIT) Law, which resulted in several major changes to the existing tax system, including a change in the applicable criteria for tax residency and a revision of the tax rates and brackets. The social security system is characterized by strong regional variation, with contribution rates and caps, registration processes and compliance requirements varying from one city to the next.
Employment income in China is taxed based on seven progressive rates ranging from 3% to 45%. The 3% base rate applies to annual income not exceeding CNY 36,000, while the top rate of 45% applies to income exceeding CNY 960,000 per year.
Personal income tax in China is calculated based on the employee’s annual comprehensive income, which comprises income from employment and personal services as well as author’s and royalty income. For nonresidents, personal income tax is calculated on a monthly basis, using the same tax rates that apply to residents but with adjusted income brackets. Employment income includes employee wages and salaries as well as additional bonuses, awards and benefits provided by the employer in cash or in kind.
When determining an employee’s taxable income, employers must consider several deductions and allowances. A standard annual deduction of CNY 60,000 is available to all residents. For nonresidents, the standard deduction is applied on a monthly basis, which means that the employer offsets a monthly standard deduction of CNY 5,000 against the employee’s gross earnings.
In addition, there are seven different itemized deductions residents (and only residents) are entitled to, including education and healthcare expenses and mortgage interest payments. Contributions to the housing fund and to the mandatory social security insurances are also deductible.
Residents pay income tax on their worldwide income. Nonresidents, on the other hand, only pay income tax on income derived from sources in China. Certain foreign-source income is eligible for the so-called six-year rule, under which it may be exempt from Chinese income tax. However, certain conditions must be met. Under the new IIT rules, individuals are considered tax residents if they:
Under the new IIT rules, individuals are considered tax residents if they:
Are domiciled in China (i.e. legal residence or center of vital interests in China)
Are not domiciled in China, but stay in China for a period longer than 183 days in a calendar year
2022 Tax Bands
Corresponding Tax Rates
Employers must withhold income tax from employee income and submit it to the local tax bureau on a monthly basis. The deadline is the 15th of the following month and the tax payment must be accompanied by a provisional income tax return which the employer must file on behalf of the employee. Late tax payments are subject to fines.
The tax year is the calendar year. Resident employees are required to file an individual tax return each year; joint filing is not permitted. The deadline is the 30th of June of the year following the respective tax year.
The Chinese social security system consists of five different insurances, which are pension insurance, medical insurance, unemployment insurance, occupational accident insurance and maternity insurance – although many cities have a combined medical and maternity insurance levy.
It is mandatory for all employees to be enrolled in the system. This includes foreign employees working in China, unless they come from a country which has a social security exemption agreement with China. The latter include Germany, Finland, Spain, Switzerland and Canada, among others.
Contributions are split between employees and employers, but rates as well as the minimum and maximum contribution base vary depending on the city where the employee is registered. Pension contributions usually amount to around 16% for employers and to around 8% for employees. The total social security levy on employers can be as high as 28% in cities like Shanghai or Beijing. For a detailed example, please refer to the table below.
In addition, there are locally administered housing funds to which both employees and employers contribute. As for the other social insurances, contribution rates to the housing fund vary from city to city and range from 5% to 12% – depending on the cost of living in the respective area.
It is the employer’s obligation to calculate, withhold and pay social security contributions on behalf of the employee as well as make the necessary employer contributions. The same obligations apply with regard to the housing fund contributions. Procedures, requirements and submission dates differ between cities and employers have to retrieve the necessary information from the respective local social security bureau.
Furthermore, it is worth mentioning that the calculation base for social security contributions is not the actual income earned by the employee in the month for which contributions are calculated, but the employee’s average monthly income, which is determined based on the total earnings of the previous year. Employers should also note that some cities levy additional social security charges that go towards separate funds covering disability or other social welfare initiatives.
The following table shows the social security contribution rates levied by the city of Shanghai. Rates are valid as of September 2022.
Employees in China are entitled to various benefits. These include:
Annual leave and public holidays: between 5 and 15 paid vacation days, depending on length of service; 7 official public holidays, of which some spread over several days
Maternity leave: 98 days of maternity leave as a national statutory minimum to which up to 30 days are added depending on the province; Shanghai and Beijing have extended maternity leave to 158 days in November 2021
Paternity leave: no regulation on national level, but most provinces provide for paid paternity leave of up to 20 days; in some cases, the mother may even be allowed to transfer a part of her unused maternity leave to the child’s father
Parental leave: no legal provisions on a national level, but certain provinces provide for several days of employer-paid parental leave per year until the child reaches a certain age
Sick leave: between 3 and 24 months of sick leave, depending on length of service, with sick pay rates ranging from 60% to 100%
For more information on employee benefits and other employment requirements in China (including severance pay and termination procedures), check out our Global Hiring Guide.
There is no national minimum wage in China. Instead, each of the 31 provinces and regions sets its own minimum wages, which sometimes even differ from one city to the next within the same province. The highest monthly minimum wage rates currently apply in Shanghai, where employees must be paid CNY 2,590 per month. The highest hourly minimum wage must be paid in Beijing and stands at CNY 25.3. Rates given are valid for 2022.
Although not mandatory, it is customary to pay employees an annual bonus equal to a monthly salary. This 13th salary is usually paid out in early February just before the Chinese New Year’s celebrations. Some employers even offer a 14th salary.
Employees who are required to work overtime are entitled to overtime pay, which must be at least 150% of the employee’s usual hourly wages. For work on rest days, employers must pay double rates, and for public holidays, the employee’s hourly pay must be tripled.
Employees in China must be paid at least once per month. If the agreed payment date falls on a public holiday or a non-business day, the payment must be issued on the last business day before the employee’s normal pay day.
Wages and salaries are typically paid via direct deposit. Payments to local authorities, notably local tax and social security authorities, are usually made via direct debit. The latter requires a local bank account.
It is mandatory to provide employees with payslips, which can be issued electronically. Payroll records must be kept for a period of at least five years.
Learn about tax reporting, compensation laws, registration requirements and more in our free Payroll Guide for China.
This country guide is for informational purposes only and should not be construed as legal advice. The content of this guide contains general information, and although we update this guide regularly, it may not reflect current legal developments. Lano Software GmbH disclaims any liability for any actions you take or refrain from taking based on the content contained in this country guide.
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