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backGLOBALtalk December, 2011

China: Expatriate Employees Now Required to Participate in the PRC Social Security System

The Provisional Measures for Foreigners Working in China to Participate in the Social Insurance System (the "Measures") took effect on October 15, 2011. The Measures require both employer and employee social insurance contributions on the monthly wages of foreign nationals working in China. The particular rates and income thresholds vary from city to city, and most cities (other than Beijing) have not yet adopted implementing rules setting up the mechanism necessary for receiving contributions of foreign employees (please see our alert Social Insurance – Impact on Employers Depends Upon Location for more details). Although an exemption is possible in connection with a social security treaty (generally referred to as a totalization agreement), currently only Germany and South Korea have signed such agreements with China.

Implications for U.S. multinational employers

- Expatriate employees in China now have to participate in the PRC social insurance system, whether they are seconded from the U.S. parent or another group company, or directly hired by a PRC subsidiary. This will generally increase the costs of Chinese expatriate arrangements, as previously only FICA contributions or other home country social security were required by expatriates seconded to work in China.

- Since most seconded employees are eligible for tax equalization, the cost of the required employee social security contribution will generally be borne by the employer. Employers may want to update cost projections and estimates of the expatriate assignments to reflect payment of the employer and employee social security contributions.

- As a first step, employers should identify the employees who are subject to the new PRC social security contributions as well as the applicable city. These employees will need to be registered with the local Human Resources and Social Security Bureau (HRSSB) in order to facilitate the monthly remittances of the social security contributions. Even though the law is in effect, registration procedures are still being developed by the local HRSSB. Going forward, new expatriate employees must be registered with the local HRSSB within 30 days after the employee has obtained a PRC work permit.

- As part of this process, employers should note that, although not entirely settled, stock-based equity awards should not be subject to the social security contributions (please see our GES alert Social Insurance Contributions Now Required for Cash Awards Granted to Expatriates Working in China for more details).

- Upon leaving China, non-PRC nationals can apply to the authorities to have the employee portion of their PRC social security contributions refunded to them (the employer portion is paid into a collective account and cannot be accessed). The refund procedures still need to be developed. Where employers have funded the employee social security taxes as part of a tax equalization program, they might consider reviewing tax equalization and assignment documentation to confirm the right to recover such refunds from the employees and also consider entering into a specific repayment agreement with the expatriate employee to be able to recover such amounts upon departure from China.

Conclusion

Multinationals in China should closely monitor developments related to the Measures, including implementing rules that may be adopted by other cities in China.

Source: Baker & McKenzie - GAI

For more information or to contact Baker & McKenzie, please click here.

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