Vicky Zhang – Finance Specialist
When a business enters China, it has to deal with aspects related to employment.
The Chinese labor law is very stringent and the risks of not being compliant are very high. One important aspect to consider is the one related to employees’ salaries.
This guide will help you to understand more about salaries and how to structure a compliant salary package in China.
Why it is important to structure a salary package for employees in China
The compensation system has two main purposes:
- ensure enterprises to control costs;
- help enterprises to effectively motivate employees.
In order to attract and retain the best talents, an enterprise must make its compensation system competitive among its peers, timely understand the compensation data of similar companies, and formulate its compensation system.
The internal meaning of the remuneration system is that it directly affects employees’ work enthusiasm and play a strong incentive role in the future development of personnel.
Important elements of the salary package in China
To structure the best salary package for employees, companies have to consider different elements. Below we analyze the most important ones:
- Gross salary
- Annual bonus
- Allowances (especially for foreigners)
Gross salary is the amount of money that comes before the deduction of the individual income tax and employee’s contribution to statutory benefits.
The gross salary is divided into fixed salary and flexible salary:
- Fixed salary – this is the fixed amount stated in the employment contract;
- Flexible salary – this refers to the commission, bonus, allowance, overtime payment or any other changeable amount that is not fixed and may vary from month to month.
In addition to the basic salary, companies can also pay annual bonuses.
The company can pay the bonus once a year, or it also can pay the bonus together with the monthly salary.
When companies choose to pay one time in one year, in this case, employees can use the special tax method of a one-time annual bonus to reduce their tax burden under China’s individual income tax law.
This provision will expire on January 1st, 2022.
The Chinese Tax Bureau allows foreign employees (including those from Hong Kong, Macau, and Taiwan) to deduct certain “allowances” before calculating the tax on their monthly salary.
Legally, the following expenses can exempt from individual income tax:
- Housing allowance
- Meal allowance
- Laundry expenses
- Relocation fee
- Home visitation
- Language training fee
- Children education expense
Housing allowance: rental fee can be claimed by the tax invoice. Property management fees and utility fees are not included. You should have a detailed rental address in the remarks area.
Meal allowance: foreign employees are allowed to deduct a certain amount that they spend on meals each month from their taxable income.
Home visitation: the cost of visiting relatives is limited to the cost of transportation by foreign individuals between their employment places in China and their home areas (including spouse or parents’ residence) and not more than 2 times per year.
Language training fees and children’s education expenses: foreigner’s language training and children’s schooling fee within China can be claimed by the official tax invoice issued by the identified education institutions.
It is not clearly specified by the law how much of a foreign employee’s salary can be used as an allowance. The tax law only mentions it should be a reasonable amount.
This provision will expire on January 1st, 2022.
Gross salary VS Net salary
Gross salary includes basic salary, meal allowance, transportation allowance, commission, and bonus which you can get before paying tax. For some companies sometimes the bonus is added.
The net salary is obtained deducting the individual income tax and the mandatory benefits (social insurance plus housing provident fund).
As said, the mandatory benefits are divided into two parts, one is the housing provident fund, the other is social insurance. Both parts are jointly paid by the enterprise and employees.
The rates vary from city to city. Taking Shanghai as an example, the mandatory benefits payment rate are as follows:
|Employee Part||Employer Part|
|Pension insurance fund||8%||16%|
|Medical insurance fund||2%||9.5%|
|Unemployment insurance fund||0.5%||0.5%|
|Maternity insurance fund||–||1%|
|Employment injury insurance fun||–||0.16% – 1.52%|
|Housing provident fund||7%||7%|
By the end of the year 2020, due to the COVID-19 epidemic, all enterprises are entitled to preferential social security policies, paying only 4.75 percent of the medical insurance fund and 0.5 percent of the maternity insurance fund.
The calculation method of China’s individual income tax is withholding and pre-payment.
That is, pre-payment of individual income tax every month, and the annual final settlement is adjusted according to the actual situation.
Taxes on salary in China
As we all know, high income means high personal income tax. Although the personal income tax threshold has been raised to 5,000 yuan, it is still a problem for high-income people to reasonably save tax.
Use the annual bonus to save tax
Bonus belongs to the category of salary and should be withheld and remitted by the withholding agent according to the tax rate applicable to salary.
However, whether a company pays bonuses on a monthly basis, quarterly, semi-annual, or annual basis, it varies under the individual income tax law:
- If the bonus is paid monthly, the bonus should be combined with the salary of the month to pay personal income tax;
- If it is a concentrated bonus (quarterly, semi-annual, annual), according to the provisions of the tax law, it cannot average to the monthly salary combined with the payment of individual income tax and should be done separately for a month of salary.
Employees can use the special tax method of a one-time annual bonus to reduce their tax burden under China’s individual income tax law.
In a tax year, for each taxpayer, this method is allowed to use only once. And this provision will expire on January 1st, 2022.
Make use of tax incentives to save tax
At the moment, the main forms of tax incentives are:
- Tax exemption
- Exemption amount
- Tax deduction
- Preferential tax rebate
- Accelerated depreciation
- Preferential tax rate
- Profit and loss offset
- Tax concession
- Deferred tax
One tax benefit that most people can use is the newly introduced “cumulative special additional deductions”.
Besides the mandatory benefits, children’s education, supporting the elderly, interest on housing loans, housing rent, and continuing education can also be deducted before paying tax.
How HROne can help you to structure a compliant salary package in China
Structuring a clear salary package is a fundamental aspect when you want to hire employees. This, together with salary transparency, is the best approach to attract qualified talents.
Our service can handle the complete employee payroll for your company in China in compliance with the local policies. As a non-state-owned consulting firm, we can directly hire employees for a company not having a legal entity in China by our specialized Employee Leasing / Talent dispatching services.