China Slaps Taxes of 48% on Foreign Employees
Payroll Withholdings to Be Levied on All Foreign Nationals
Starting on October 15th, all foreign nationals working in China will be subject to payroll taxes for retirement funds, medical insurance, worker's compensation, unemployment insurance and maternity insurance, regardless of how long they are employed in the country, according to a new regulation issued by the Ministry of Human Resources and Social Security.
While these expatriate workers would theoretically be able to make use of services paid for by these fees, in practice few foreign nationals would have an opportunity to take full advantage of social welfare benefits in China, and the new measure is expected to cause financial difficulties for businesses that employ significant numbers of foreign nationals and to provide disincentives for hiring non-Chinese citizens.
The payroll taxes would require payments by both employees and companies, with workers having 11% of their salary deducted for the benefit funds, and employers would need to pay a fee of a further 37% of the employee's salary. In the past, while foreign employee salaries were subject to taxation, they were exempt from payments to social welfare funds on the basis that foreign nationals were not eligible to receive these government benefits, and since most foreign employees were stationed in China for a limited term they would not likely have the opportunity to take advantage of retirement funds or other benefits.
The regulation states that foreign workers who leave China before retirement age - 60 for men and 55 for women - can claim back their pension contributions, however, the contribution from employers would be retained by the government.
According to reports in the Shanghai Daily and elsewhere, the amount of a worker's salary subject to taxation will be capped at no more than three times the average salary in any given city, meaning that the ultimate burden will be lower for expats whose salaries exceed that that amount. Foreigners from countries that have signed a social insurance agreement with China apparently will not have to pay the new tax, according to a statement in the Shanghai Daily said.
Also, as report recently in the South China Morning Post, Chinese from Hong Kong, Macau and Taiwan are likely to be exempt from the tax.
According to official government statistics, about 593,800 foreigners were working in China at the end of 2010.