What global businesses need to know about doing business in China
China needs no introduction as a place to do global business, and its increasing openness to international commerce is well-documented. Although it has been overtaken by India as the world’s most populous country, it is comfortably second in the list of biggest economies, with nearly four times the GDP of third-placed Germany.
China is the world’s biggest importer and its second-biggest exporter, and compared to most Western countries, still relies strongly on manufacturing: more than a third of its GDP is generated by industry. Of the 500 largest companies in the world, over 140 of them are headquartered in China, but there are opportunities for businesses of all sizes, thanks to a total labor force of nearly 800 million people.
One key piece of executing business successfully is managing payroll in China. It’s essential to stay in line with the country’s complex payroll laws, tax requirements and employment considerations, which can vary substantially in different parts of the country. Here, you’ll get the key facts on getting started:
Getting Started with China Payroll
Wholly foreign-owned enterprises (WFOEs) are the most popular business structure for those intending to conduct revenue-generating business in China long-term. The ‘Five-In-One Business License’ has made the registration process much simpler than it used to be (although the single online application is still quite long), and will arrange your:
- Business license: the main registration certificate, valid for a certain duration according to the company’s investment plans
- Organization code: the unique code used for communications with government departments
- Tax registration certificate: proof of registration with the state tax authorities, to whom tax filings are made
- Social security registration certificate: same as tax registration, but for social security contributions
- Statistical registration certificate: registration for providing financial, employee and salary data to the relevant government department, a monthly requirement for WFOEs
You will need a proof of lease for your chosen office location to start the registration process. You will also then need to complete some other registrations, such as for VAT, and an import/export license if required.
The amount of capital required to establish a WFOE varies depending on the nature, size, and location of the company’s Chinese office, and is subject to taxation by Chinese authorities. However, the requirement for capital is waived for businesses operating in certain industries, including IT, trading and consulting.
Companies also need to supply a feasibility study, a scope-of-business statement, and proof of their financial status (with a Chinese bank) to receive government approval.
Employment Considerations
Under Chinese labor law, all full-time employees are required to sign employment agreements with employers, although oral contracts may be permissible for part-time workers. Yet the stipulations multinational companies must adhere to depend on their business structures – for example, only limited companies (such as WFOEs) are eligible to sign employment contracts directly with Chinese workers.
Employees are generally required to have proof of residence in the city in which they apply for employment, and employers must file the appropriate social insurance paperwork on an employee’s first day. Contracts must stipulate:
- Employer details
- Employee details, including ID number
- Job description
- Terms and remuneration
- Social insurance
- Information around hazard prevention, safety and the working environment
Workers from abroad can be employed only with special permission from the local labor authorities and after obtaining an employment certificate (or work visa) for the employee.
Standard working hours are 40 per week and eight per day, although some employers choose to ignore these restrictions. Overtime should normally be limited to one hour per day, but with prior agreement can be increased to three per day and 36 per month in exceptional circumstances. Overtime should be paid at 150% of normal rate, rising to 200% at weekends and 300% on public holidays.
Probation periods run for a maximum of six months, although shorter terms can be applied to fixed-term contracts no longer than three years in duration. Notice periods are 30 days, or three days during a probation period.
Compensation & Severance Considerations
Minimum wages in China vary greatly between different provinces, and even between different cities and areas within each province. For example, Shanghai currently has the highest rate of 2690 yuan per month (approx. £295; $370; €355), with Beijing slightly lower at 2,420 yuan per month (approx. £265; $335; €320).
The lowest rates can be as much as a third less than the corresponding rates in the big cities. These figures can vary on a monthly basis, and different provinces change their rates at different times of year.
Severance pay is calculated as one month’s salary for every year of service. The employer can pay one extra month’s salary beyond the severance pay requirement in the event that they do not want to comply with the 30-day advance notice period. For employees on high salaries for the area, severance pay is capped at three times the local average wage.
Bonus Considerations
The payment of a 13th-month salary in time for Chinese New Year (i.e. towards the end of January) is not a legal requirement, but is a customary payment that many Chinese employees will expect. In some cases, 14th-month bonuses are also paid in the same way. The exact nature of these bonuses should be laid out in employment contracts.
Fraud and bribery are sensitive issues in China, so foreign companies should exercise caution around commission-based bonuses or other incentive-based compensation arrangements.
Taxes, Benefits & Withholdings
Like many countries, personal income tax in China is subject to progressive rates that apply greater tax deductions to higher earners.
The first 36,000 yuan (approx. £3,900, $4,900, €4,700) earned per year is taxed at 3%, after which six progressively higher rates apply, up to 45% on earnings above 960,000 yuan (approx. £105,000; $132,000; €126,000). Any non-residents who spend more than 183 days in China in any one year are liable to pay tax on all their income earned worldwide.
Employers are required to withhold taxes and pay them to China’s tax bureau before the 15th of each month. Employers are also required to withhold and pay a shares tax, bonus tax, or severance tax when applicable.
China’s social security contribution system is complex. Firstly, there are several different schemes to contribute to – pension, medical, unemployment, maternity, work-related injury, and the housing fund. And then these contributions vary from one province to another. Using Beijing and Shanghai as the most common examples, employees can expect to contribute between 15.5% and 22.5%, while employer contributions can run at anywhere between 31% and 40%.
Required withholdings must be paid to the Bureau of Labor Insurance, National Health Insurance Council, and the Employee Pension Board before the 15th of the following month.
Leave, Vacations & Holidays
Workers in China are entitled to time off during public holidays, which are considerable in number compared to many Western countries. There are 16 days of public holidays, many of which are grouped with weekends to create longer festivals: Chinese New Year (late January/early February), the Labor Day festival (early May) and the National Day festival (early October) can run for up to a week each in total. China’s government occasionally also establishes special holidays on short notice.
Paid leave entitlement is low, starting at five days per year after one year’s service, rising to ten days after ten years and 15 days after 20 years. On top of this, employees can also apply for sick leave, marriage leave, and funeral leave, when applicable. Sick pay generally starts at 60% of salary, rising by 10% after each two full years of service; these figures can vary in different places around the country.
Mothers are generally entitled to 98 days of maternity leave, though certain provincial regulations extend the amount of leave available (in some instances, by as many as three months). An extra 15 days can be awarded in the event of a difficult childbirth.
Maternity pay is 100% of salary, although most places have a base level of three times minimum wage. It’s covered by social security if the employee has maternity insurance, and by employers if they don’t. Paternity leave varies between seven and 30 days across provinces and is paid by local authorities.
Organizations setting up payroll in China are wise to consult China’s Population and Family Planning Rules and other guidelines for complete and up-to-date information.
China Payroll: A Summary
China’s position as a global economic superpower is assured for a long time to come, and so it’s natural for any business looking at expansion to consider the vast Chinese marketplace.
However, as this guide demonstrates, it can be a fiendishly complex place in which to run payroll, with lots of administration and a huge amount of variation in regulations from one province to another. Throw in the differences between Chinese and Western cultures, and it’s clear that having China-specific payroll expertise to hand is essential for success. That’s where a global payroll partner that combines outsourcing capabilities, leading technology and Chinese cultural know-how can make a real difference to your expansion potential.
This guide is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional. Click here to see more country payroll guides from CloudPay