China Payroll and Benefits Guide

What global businesses need to know about doing business in China

China is one of the world’s great financial powerhouses. With its population of nearly 1.4 billion people and its considerable growth, it is understandably high on most multinational companies’ wish lists for expansion.

According to the American Chamber of Commerce 2022 South China report, 72% of the companies surveyed intended to expand their China operations over the next three years

At $17.7 trillion in 2021, China is second only to the United States in terms of gross domestic product, but it overtakes the US when purchasing power is taken into consideration.

China also regularly ranks as the world’s biggest exporter and second-biggest importer. And while COVID-19 originated in China, the pandemic has barely made a dent in its growth. Only the initial quarter of 2020 saw a contraction, and the Chinese economy has continued to grow thanks to continued global reliance on its manufacturing, although the trade war with the United States remains an ongoing concern.

It should be noted that at the time of writing, there are still heavy COVID-related restrictions in place within China, especially regarding the entry of foreign nationals. 

But once these eventually clear, there should still be rich opportunities for businesses moving into the Chinese market, especially in manufacturing, energy, real estate and commodities trading. 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. Here, you’ll get the key facts on getting started:

Getting Started with China Payroll

The favored locations for global businesses setting up in China are the major industrial and financial centers of Shanghai, Beijing and Guangzhou, or one of China’s many free trade zones, of which Shanghai has one. Once an organization has selected an office location, a proof of lease is required to start the registration process.

Joint ventures (JVs), representative offices (ROs), and wholly foreign-owned enterprises (WFOEs) are the three most common business structures for multinational companies in China. Because there are significant limitations on JVs and ROs, WFOEs are the most popular for those intending to conduct revenue-generating business in China long-term. 

Setting up a WFOE used to be extremely complex. But in an effort to simplify and speed up the process, a new ‘Five-In-One Business Licence’ was introduced by the Chinese authorities in 2017. This combines five key elements of registration into a single (albeit lengthy) online application:

• 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

This does not cover all the registrations required: other areas like VAT or import/export need their own certificates, although some Chinese states are also incorporating these into the ‘Five-in-One’ programme, too.

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

One of the biggest risks employers face in executing China payroll is not fully complying with the nation’s employment guidelines. The basic principles, however, are generally similar to most developed Western economies: all employees must be treated fairly or equally regardless of race or sex, workers have the right to organize and negotiate collective bargaining agreements at company level, and children under 16 must not be employed.

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. If the company is a Representative Office (RO), then it can only hire local employees through a licensed third party known as a “local service unit.”

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

Employees may be hired on a permanent or temporary basis; a temporary contract can be for a fixed period of time or until the occurrence of a certain event. 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.

Compensation & Severance Considerations

Minimum wages in China vary greatly between different provinces, and even between different cities and areas within each province. The highest rates are in Shanghai at 2590 yuan per month (approximately £310; $390; €370), and 23 yuan per hour (approx. £2.80; $3.40; €3.30). The lowest are only around half of the highest: the minimum rate in some cities in Anhui province is 1340 yuan per month (approx £160; $200; €190) or 16 yuan per hour (approx. £1.90; $2.40; €2.30). These figures can vary on a monthly basis.

Officially, China has an standardized national eight-hour work day, an average working week no more than 40 hours long, and at least one day off per week, although many employers don’t adhere to these guidelines.

Due to the many labor agreements affecting Chinese employers, overtime work may be required of employees only after consultation with any applicable trade unions (unless the situation is an emergency). Following any required consultations, overtime work is limited to one hour per day, or 36 hours per month. Normal overtime pay is set at 150% of normal wages; overtime work performed on ‘rest days’ (weekends) must be paid at 200% of normal wages, and extra work performed on holidays must be paid at 300% of normal wages.

High-ranking managers are not automatically entitled to overtime pay rates, and they may be employed under the alternative Flexible Working Hour system that allows companies to employ them at normal pay rates for more than 40 hours a week.

An employee may terminate employment with 30 days’ written notice. Employers must provide 30-day advance notice to an employee to part ways with mutual consent, and must pay severance unless the employee failed to satisfy the conditions of his or her employment contract and/or violated any laws or company policies. 

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

In many parts of China, it is customary to pay the salary on a 13-month basis, by incorporating an additional final month that is paid just prior to the Chinese New Year (typically in early February). This is optional – and would be laid out in the employment contract – but many employees expect to receive it and problems may arise if it isn’t offered. This extra month is taxed in the same way as regular earnings. Some companies also provide 14th- and 15th-month bonuses, adjusted according to performance reviews.

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. This is thanks to the new individual income tax (IIT) law which came into force in January 2019.

The first 36,000 yuan (approx. £4400, $5400, €5100) earned per year is taxed at 3%, after which six progressively higher rates apply, up to 45% on earnings above 960,000 yuan (approx. £115,000; $145,000; €135,000). 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.

Employers and employees are required to contribute to China’s mandatory social insurance schemes – pension insurance, medical insurance, industrial injury insurance, unemployment insurance, and maternity insurance – as well as to its ‘Housing Fund,’ which allows Chinese employees to save money towards purchasing their own home. (Note: Employee contributions may not be required for injury and maternity insurance.)

The amount of social insurance and Housing Fund contributions are adjusted each year for every city or region, with the amount determined using the average salary in each city. Like the minimum wage rates, these are subject to change frequently. Employer contributions can range between 31.5% and 48% of salary, while employee payments can range between 15.5% and 27%.

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.

The Chinese government introduced a small discount on employers’ health insurance contributions following the outbreak of COVID-19, with no fixed expiry date (as of the time of writing).

Leave, Vacations & Holidays

Workers in China are entitled to time off during public holidays, which are considerable in number compared to many Western countries. The two main national holiday periods, the Spring Festival around Chinese New Year (late January and early February) and the Chinese National Day holiday (early October) provide three days’ holiday each. Other national and regional holidays are also observed throughout the year. China’s government occasionally also establishes special holidays on short notice.

Employees are entitled to between 5 and 15 days of paid annual leave at a sliding scale based on their length of service to the employer. Employees are not entitled to any leave in their first year, and must work for over 20 years for the same company to receive the full 15-day entitlement.  On top of this, employees can also apply for sick leave, marriage leave, and funeral leave, when applicable.

Rules around maternity and paternity leave have changed significantly since China relaxed its long-standing one-child policy in 2015. Women are generally entitled to 98 days of maternity leave, paid by the employer, 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. Terminating the employment of a woman who is pregnant or who has a child under the age of one year is prohibited and punished severely. Paternity leave entitlement is normally ten days, but can also vary by region. 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.

In Summary

With a large economy, a huge labor force and considerable clout on the world stage, China offers a variety of advantages for multinational companies looking to do business there. However, the rules around employment and payroll are highly complex, are liable to frequent alteration, and vary significantly across different cities and regions. Add in a difference in culture between China and Western countries, the lingering effects of the pandemic, and often a language barrier, and the difficulties can easily pile up. 

The best way to help your organization achieve ongoing success and compliant outcomes with China payroll is to consider outsourcing your payroll operations to a trusted, global managed services provider. That way, you can feel the benefit of experience and expertise in Chinese payroll issues and operations.

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