By Gidon Gautel and Zoey Zhang
Editor’s Note: This article was first published on August 28, 2017, and was last updated on February 1, 2021.
Social insurance exemption for foreigners can be a valuable asset for employers and foreign employees to save on unnecessary costs. However, many companies hiring eligible employees are not aware of the benefits available to them, while those who do are often unsure as to how to go about applying.
China’s social security system consists of five different types of insurance, plus one mandatory housing fund. The five “insurances” are pension, medical, unemployment, work-related injury, and maternity insurances.
The premiums for pension, medical, unemployment insurance, and mandatory housing found are jointly contributed to by the employer and employee, while the premiums for work-related injury and maternity insurance are solely contributed to by the employer.
While regional authorities manage the social insurance system – not all regional governments have enacted the implementation rules for China’s international social security agreements.
China has signed social security agreements with 12 countries, but only 11 such agreements have been implemented. Currently, expatriates from Germany, South Korea, Denmark, Canada, Finland, Switzerland, the Netherlands, Spain, Luxembourg, Japan, and Serbia are eligible for social security exemptions across China.
In this article, we look at who is eligible for exemption and how to apply.
Social insurance in China
The Ministry of Human Resources and Social Security requires foreign employees working in China to participate in its social insurance scheme as detailed in the Interim Measures for the Participation in Social Insurance of Foreigners Employed in China, 2011.
According to Chinese labor law, any foreigner employed by a legally registered entity in China or any foreigner dispatched to a registered branch or representative office of a foreign company – must participate in basic pension insurance for employees, basic medical insurance for employees, work injury insurance, unemployment insurance, and maternity insurance.
However, since social insurance is managed at a regional level, a range of inconsistencies exist among cities. As a result, most major cities have implemented their respective requirements for foreign employees.
For example, in cities such as Beijing, Tianjin, Shenzhen, and Nanjing, among many others, social insurance payments are compulsory for foreign employees – who are treated in the same way as domestic workers. On the other hand, Shanghai does not currently require foreign employees to contribute towards social insurance.
Since all regional authorities have not implemented rules in accordance with international social security agreements – which increases the difficulty in obtaining exemptions – employees from countries that have agreements with China are eligible for social insurance exemptions.
To date, 11 such agreements have been implemented between China, and the following countries: Germany, Korea, Denmark, Canada, Finland, Switzerland, the Netherlands, Spain, Luxembourg, Japan, and Serbia.
China has also signed agreements with France and Serbia; these agreements are not yet in effect.
All existing agreements define the groups of employees eligible for exemption and lay out the categories of social insurance for which employees are exempt from paying.
In turn, Chinese employees sent to the participating country will also be exempt from making the relevant social insurance contributions there.
Social insurance exemptions are only available to a defined group of labor categories, and not to all foreign employees.
The 11 bilateral agreements with China for social insurance payment exemptions that have been implemented are shown in the table below.
For example, the China-Japan social insurance agreement, which took effect September 1, 2019, will exempt Japanese nationals from China’s basic pension contribution as well as exempt Chinese nationals from Japan’s National Pension and Employees’ Pension Insurance.
It will apply to dispatched personnel, employees on board ships and aircraft, civil servants, and diplomatic and consular personnel of each side.
As to the agreement with France, which is not yet effective, details including the implementation date and range of exemptions will be announced – once each country completes their respective domestic legal procedures.
Basic process for applying for premium exemptions
Exemption does not apply automatically, and companies with foreign employees are required to apply to related bureaus for exemption.
Though the process of applying for insurance premium exemptions varies across regions, and according to the specific agreement under which it is performed, it follows a standard formula.
The entity that employs the foreign employee in China must submit original certification of insurance issued by a relevant entity in the country of origin to the local Chinese social insurance bureau.
This will then be verified, and a copy will be held on record. Following verification of this documentation, and possible further verification and certification, the employee in question will be exempt from the relevant social insurance payments.
The time limit of the exemption period may vary.
For employees from the Netherlands, for example, the maximum length of the exemption period is five years. If the dispatch period is more than five years, the time limit for exemption will not be extended for more than one year.
Difficulties of implementation
While social insurance exemption agreements offer cost benefits to enterprises based in China, businesses should act in caution regarding how they go about availing them.
Although bilateral agreements for exemption are made at a national level, regional governments must implement the system locally.
This invariably results in inconsistencies and varying levels of implementation at a local level, complicating the process for companies and foreign employees.
David Niu, Senior Manager of Human Resources Administration and Payroll Services at Dezan Shira & Associates, explains: “Officers in social insurance bureaus are often unsure about how to implement foreign employee social insurance exemptions. Many cities have no local regulations relating to this topic, especially in second and third-tier cities.”
He elaborates: “Cases exist where city-level regulation for insurance exemption is not at hand from the local bureau. In such cases, if a business makes the decision not to make social insurance payments for their foreign staff, they may be challenged by the bureau for non-compliance during a later insurance inspection.”
David also highlights a key grievance that emerges in this area in the case of Shanghai.
“By local rule, female foreign employees are not required to contribute to maternity insurance in Shanghai, which can cause some disagreement between the employer and the employee. In case the foreign female staff needs to take maternity leave, the local social insurance bureau will not cover the payroll and relevant costs for the staff during the leave.”
“However, from the employer’s perspective, they seem to have no legal obligation to compensate the cost themselves either. Thus, the employer should reach an agreement prior to employing the staff to define the future obligations and responsibilities to avoid labor disputes on this issue.”
Finally, companies should note that failure to pay social insurance premiums when not in receipt of explicit consent from the local social insurance bureau bears an inherent risk.
Therefore, it is essential to consult both the local social insurance bureau, as well as relevant staff at the local labor bureau before taking any unilateral measures.
Additionally, seeking the help of an advisor is highly recommended. If appropriate precautions are taken, these agreements can be beneficial tools for enterprises employing foreign staff in China.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
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