Gathered By Vincent Cheung

In China, there are three different social benefit schemes and their application depends on the employee’s “hukou”.

1. Urban Social Insurance – for Shanghai residents residing in urban areas
2. Township Social Insurance – for Shanghai residents residing in Shanghaisuburb areas such as Qingpu, SongJiang, NanHui, JinShan, etc.
3. Integrated Social Insurance – for non- Shanghai residents

For urban and township social insurance, the company’s contribution is equivalent to 44% and 32% of the employees’ salary respectively. This contribution would go towards the employees’ pension, unemployment, medical, workplace and maternity insurance as well as public housing fund. In addition, a minimum and maximum salary range applies for the contribution to various insurance items and public housing fund.It’s very important for foreign employers to have a good understanding of China’s mandatory welfare payment system when hiring Chinese staff.

An FIE’s employment matters are subject to Chinese Labor Law and related regulations. Social mandatory welfare system such as pension fund, medical fund, unemployment fund, and housing fund, which varies in different regions, are legally required. It’s literally against the law not to pay employees’ funds. In Shanghai, Fresco is responsible for ensuring that mandatory welfare payments are legally made.Employee contributions to the respective funds will be treated as deductible for PRC IIT purposes. In 2006, The Ministry of Finance and the State Administration of Taxation (SAT) have jointly issued tax circular (Circular 10) to further clarify the tax free contributions to Basic Pension Fund, Basic Medical Insurance, Unemployment Fund and Basic Housing Fund. It further stipulates that for Basic Pension Fund, Basic Medical Insurance, Unemployment Fund and Basic Housing Fund, any part of contributions made in excess of the statutory limits specified are treated as normal salary and must be treated as subject to the PRC IIT. It’s crime to substitute the regular salaries of the employees with excessive amount of employer and employee contributions to housing fund as a vehicle of tax evasion. Check out the following tdctrade’s extract from guide to doing business in China.

Insurance and Welfare for Chinese Staff
Insurance and welfare expenses for serving Chinese staff can be treated as costs, expenses, insurance and welfare and kept by the enterprise for use in paying for the medical, insurance and welfare expenses of serving staff.

Retirement Fund and Unemployment Insurance Fund for Chinese Staff
Pension and retirement fund and unemployment insurance fund for Chinese staff set aside by the enterprise in accordance with the standards set by the government can be treated as costs and expenses and handed over to the organisation in charge of retirement and unemployment insurance for management. The funds can only be used for labour insurance and not for any other purposes.

Housing and Cost of Living Allowances for Chinese Staff
Allowances for housing and cost of living set aside by the enterprise in accordance with the standards set by the finance department and labour department can be treated as costs and expenses. Housing allowance should be retained by the enterprise in the form of a subsidy fund and used for subsidising the construction, maintenance and purchase of housing for the Chinese staff. Cost of living allowance should be handed over to the local finance department.

Labour Union Fund
Enterprises should put aside 2% of their total payroll each month as labour union fund, and this item should be treated as costs and expenses. The labour union fund is managed and used by the labour union of the enterprise concerned according to the relevant regulations of the All-China Federation of Trade Unions.

Vincent Cheung, www.PathToChina.com

Path To China is an International Business Consulting Firm that provides foreign investors with business registration service in China.