Human Resource & Tax Alert - Foreign Employees’ Participation in the Social Insurance Scheme in Shanghai, Mainland China

For the past decades, foreign employees as well as Hong Kong, Macau and Taiwan residents in Shanghai could be exempt of participating in the PRC social insurance scheme. From August 15th, 2021, this option may no longer be be applicable since the relative regulation expired. A new notice was released on August 30th, 2021, indicating that any delay in social contribution settlement would have negative impact on personal record and benefit of social insurance.

This tax alert aims to give interpretation on existing relevant policies, impact on employers and employees, measures for participation and share RSM’s insights on this matter.

Key Content

General Provisions for Social Insurance

Chinese nationals employed by China entities are subject to the social insurance (that is, must participate in the social insurance system) in China. Under the new China Social Insurance Law, which took effect on July 1st, 2011, foreign nationals working in China must also participate in the social insurance system. The Ministry of Human Resources and Social Insurance in China released interim measures for the participation of foreign nationals employed in China in social insurances on September 6th, 2011. Those interim measures took effect on October 15th ,  2011.

Under the interim measures, foreigners who have obtained a China Permanent Residence Certificate, Work Permit, Foreign Expert Certificate or Certificate of Permanent Foreign Correspondent are required to contribute to Chinese social insurance schemes. They must participate in basic pension schemes, basic medical insurance, work-related injury insurance, maternity insurance and unemployment insurance. Chinese employers are required to perform social insurance registration for foreign employees within 30 days after the employees obtain a work permit and withhold the required contributions on a monthly basis.

Besides, under rules that took effect on January 1st,  2020, employees from Hong Kong, Macau and Taiwan who have entered into local labor contracts in China shall contribute into the China social security system in accordance with the national social insurance law. After that, effective from November 28th , 2017, these employees are also allowed to participate in the China housing provident fund.

Social security tax rates vary among cities. Employers and employees are subject to social security taxes at an average rate of 25% and 11% of gross income, respectively. For this purpose, the amount of gross income is capped at three times the average salary in the city for the preceding year as published by the local government.

Totalization Agreement on Social Insurance

Special rules apply to foreigners from certain countries or territories. Under most totalization agreement, foreign employees who are required to participate in the pension schemes of their home countries can be exempt from the contributions to pension insurance in China.

Currently, China has entered into totalization agreements with the following countries: -

Canada

Germany

Netherlands

Denmark

Japan

Serbia

Finland

The Republic of Korea

Spain

France*

Luxembourg

Switzerland

*The totalization agreement with France had not yet entered into force as of the time of writing.

Local Practice in Shanghai

However, since the governance of social insurance collection and implementation falls under the city’s administration, at regional and provincial levels, some special provisions and treatments on the social insurance participation may apply, e.g., foreign employees’ non-participation in social insurance scheme in Shanghai.

With reference to Article 1 of “Notice of Shanghai Municipal Human Resources and Social Security Bureau on Several Issues Relating to the Contribution to Social Insurance for Foreign Employees, Persons with Permanent (Long-term) Residence Abroad and Residents from Hong Kong, Macau and Taiwan Working in Shanghai” (Hu Ren She Yang Fa [2009] No.38, hereinafter referred to as “Notice 38”), foreign employees in Shanghai MAY contribute to the basic pension insurance, basic medical insurance and work injury insurance by following relevant regulations, which shall be included into employment contracts. In that case, it is generally understood that foreign employees in Shanghai do not necessarily participate in PRC social insurance scheme, which however would be no longer applicable with the expiry of Notice 38 on August 15th , 2021.  

In the meantime, Shanghai Tax Bureau has released “Circular on Matters Related to the Collection of Social Insurance Premiums in this Municipality” (State Administration of Taxation Shanghai Tax Bureau Notice [2021] No.3, hereinafter referred to as Notice 3) effective September 1st , 2021, where no specific treatment to foreigners employed in Shanghai has been mentioned. However, Article 2 of the Notice 3 stipulates that any overdue payment shall, negatively, affect personal record and benefit of social insurance. In this case, it is worth being noted that the timely enrollment and payment of social insurance is necessary to avoid future dispute since Notice 3 could be treated as the defaulted enforcement for foreigners employed in Shanghai to participate in social insurance scheme as PRC nationals.

RSM Insights

With the continuous improvement of the social insurance system, as well as the overall trend of including social insurance into taxation’s governance and declining difference in treatment to foreign and national individuals under the new individual income tax, foreign employees would enjoy equal rights and also fulfill equal obligations in future.

Upon that, we believe foreign employees in Shanghai are probably required to follow the national laws and regulations and thus obliged to participate in the social insurance scheme accordingly, while for those who are resident from certain countries or territories shall apply to special rules listed in totalization agreements can still enjoy the exemption of contribution in China or the alternation to China pension instead of home countries’ pension. As a result of social contribution, foreign employees would have concern as they may obtain less take-home pay. On the other hand, the employers would face increasing cost of hiring foreign individuals.  

However, there remain uncertainties and before any further legislations are released, it is suggested that the employers shall make proactive plans for any potential changes in labor costs and welfare security of foreign employees, including:-

  • Employers in Shanghai shall pay close attention to any update on relevant legislations released in the near future and focus on whether the social insurance policies for foreigners will be reformulated;
  • Employers in Shanghai shall keep active communication with current foreign employees regarding their participation or non-participation in social insurance as well as potentially reduced net pay incurred to such change in policy; and
  • Employers in Shanghai shall perform the simulation so as to adjust the hiring budget, and also consider restructuring the remuneration package accordingly for foreign employees/candidates in response to such change in policy.

Besides, for new foreign employees hired after September 1st, 2021, it is suggested that employers shall consider, through active communication, to have all of them participate the social insurance scheme, i.e., to avoid unnecessary compliance risk from government side as well as labor disputes from the employees’ end.

For any doubt or questions for the above, please feel free to contact RSM China. Contact: [email protected]

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