China’s new social insurance related regulations (the Interim Measures)1, which took effect on October 15, 2011, require expatriates to contribute a portion of their monthly earnings into a national social insurance pool. The new regulations created an immediate stir among expatriates and the companies that employ them, because it effectively increases a company’s direct annual employment costs by approximately RMB50,000 (US$8,000) per expatriate employee in larger cities, and mandates an additional charge against individual expatriates' annual earnings of approximately RMB15,000 (or US$2,400).
On December 6, 2011, China took the next critical step of implementing the new regulations by issuing a circular (Implementing Circular)2 that requires social security agencies across China to register all qualifying expatriate workers with the local social insurance agency by December 31, 2011, and to notify expatriate employees and their employers of their obligation to participate in the national social insurance program.
Under the new contribution scheme, expatriate employees and their employers are required to make monthly contributions into a national social insurance program that allocates the funds into five categories: (i) pension insurance, (ii) medical insurance, (iii) unemployment insurance, (iv) work-related injury insurance and (v) maternity insurance. The current allocation of social insurance contributions is summarized below.
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Covered Expatriate Employees
Under the Interim Measures, an "expatriate employee" is defined as any foreign national who has obtained either (a) a work permit in China (including an "Alien Employment Permit", "Foreign Expert Certificate" and "Press Card") and his/her PRC residence permit, or (b) a PRC Permanent Resident Permit and is presently working in China. This includes individuals from Taiwan, Macau and Hong Kong.
The Interim Measures define an "employer" as any entity that has been established in China (including companies, public institutions, social groups, private non-enterprise entities, foundations, law firms, accounting firms and the branches or representative offices of foreign companies) that employ expatriates (an Employer).
Employers are required to register each expatriate employee with the local social insurance agency within thirty (30) days after the employee obtains a work permit. Upon completion of the registration, the employer and the employee must pay social insurance premiums in accordance with relevant laws and regulations. Pursuant to the Implementing Circular, for expatriates employed before October 15, 2011, the due date for the registration and contributions is December 31, 2011. Employers who fail to register their expatriate employees and contribute the payment on their behalf before the deadline will be subject to a late payment penalty of 0.05 percent of the overdue amount for each day that the payment is not paid. If the employer still fails to pay the premiums within the time limit prescribed by the social securities authorities, the authorities may impose a fine of one to three times the outstanding amount on the employer.
The amount of social insurance contributions that an expatriate employee and his/her employer must pay varies within cities in China. In Shanghai, employers must pay a total of 37 percent of each employee’s average monthly salary in the preceding year, and expatriate employees must pay 11 percent of their average monthly salaries in the preceding year, subject to a cap equal to three times the local average monthly salary of urban employees in the preceding year.3 The current cap on annual employer contributions per employee in Shanghai is RMB51,895 (approximately US$8,113) and the annual cap for expatriate employees is RMB15,428 (approximately US$2,412). The maximum cap on contributions is adjusted each year by city governments.
The social insurance laws indicate that individuals who have made social insurance contributions are entitled to collect a basic monthly pension if such individual has made pension contributions for an aggregate of 15 years by the time that he/she reaches China’s statutory retirement age (60 years old for males and 55 years old for females). This 15 year period does not need to be a continuous period, but an aggregation of all of the time that the employee has validly worked in China.
If an expatriate employee leaves China before the retirement age and does not intend to work in China again, the proportion of the funds in his/her pension account that was funded by individual contributions may be withdrawn by the expatriate, but the portion of the funds paid by the Employer is essentially forfeited to the government. If an expatriate leaves his/her current job in China with the expectation of working at a different job in China in the future, he/she may choose to maintain his/her social insurance account, which may be re-activated at the time he/she returns and is re-employed in China.
If an expatriate employee is qualified to receive monthly social insurance benefits but presently resides outside of China, he/she must provide a certificate evidencing that he/she is alive. The certificate must be issued by the PRC embassy or consulate in the expatriate’s home country, or be notarized by the relevant authority of the country where he/she resides and by the relevant PRC embassy or consulate. The certification requirement may be waived if the expatriate enters China and appears before the relevant PRC social insurance authority.
The funds in an expatriate employee’s apostrophe pension account may be inherited upon the death of the employee.
An employee participating in a (if there is more than one or ‘the’ if not)medical insurance program is entitled to use the funds in his/her personal medical insurance account to pay for designated medical services and pharmaceuticals in local hospitals that are covered by the statutory medical insurance scheme. However, clinics and hospitals set up for expatriates are not currently covered under China’s social insurance scheme.
For the reasons stated below, except for the pension and medical benefits summarized above, it is uncertain whether expatriates are eligible for the full range of other types of social insurance benefits:
- Maternity Insurance – Under China’s maternity insurance program, a female employee is entitled to (i) a lump sum medical expense subsidy (in Shanghai, RMB3,000), and (ii) maternity allowances equivalent to four months of the employee’s monthly salary. However, since foreigners are not subject to the one-child policy, it is unclear whether female expatriates would be eligible to receive maternity insurance for multiple children.
- Unemployment Insurance – Unemployed individuals who have participated in the unemployment insurance program may apply for monthly unemployment benefits for a period of between 12 to 24 months, depending on the number of years that such employee participated in the unemployment insurance program prior to his/her unemployment. The amount of the monthly unemployment insurance benefit is determined by the relevant provincial level government, but cannot be less than the minimum cost of living for urban residents. Given that expatriates generally leave China shortly after the termination of their employment, it is unclear how the unemployment insurance will apply or otherwise be paid to expatriates who have returned to their home countries after their jobs in China have been terminated.
The Interim Measures are silent on whether the monthly social insurance contributions may be deducted from an expatriate employee’s taxable income. However, national tax regulations allow certain employee contributions (i.e. for pension insurance, medical insurance and unemployment insurance) to be tax deductible.4
According to the Interim Measures, expatriate employees who are nationals of countries that have entered into bilateral or multilateral social security agreements with China must make social insurance payments in accordance with such agreements. To date, only Germany and South Korea have entered into these types of treaties with China. However, since the release of the Interim Measures, many countries, including the United States, have requested China to enter into bilateral social security agreements so that the citizens of these countries may be exempt from the making social security contributions in China, particularly if they are already making similar contributions in their home country.
- German Expatriates – German nationals who work in China do not have to make social insurance contributions for a period of 60 months after their first application for the treaty-based exemption. The exemption period may be extended to 96 months following approval from the PRC social insurance authority. In order to apply for the exemption, the German expatriate must provide valid certificates5 issued by social insurance authorities in Germany evidencing that the expatriate has participated in pension and/or unemployment insurance programs in Germany.
- South Korean Expatriates – South Korean nationals who work in China are exempt from paying pension insurance if they can provide a certificate6 issued by the social insurance authorities of South Korea evidencing that they have participated in a pension insurance program in Korea during the period set forth in the treaty between China and South Korea.
Beijing is thus far the only city in China that has issued city-specific guidelines7 regarding the Interim Measures. It is anticipated that other cities in China, including Shanghai, Tianjin and Shenzhen, will issue local implementation rules in the near future. For the time being, employers would be well advised to review the new regulations and consult with professional advisors regarding necessary operational adjustments to ensure compliance with the new laws.