A FESCO in China: A Smart Move for Foreign Companies
China presents exciting opportunities for foreign companies looking to expand internationally. To enter the Chinese market, there are several important laws that a company must abide by during the establishment of a local presence. For many foreign companies trying to get the initial foot in the Chinese market, it may be a difficult task due to the lack of knowledge on local regulations and requirements. A FESCO can help.
- The Role of a FESCO Agency in China
- Supporting All HR Requirements in China
- HROne as a FESCO
The Role of a FESCO Agency in China
A big one is that in order to hire local or foreign employees, all workers must be employed by a legal entity registered in Mainland China.
Foreign companies can use a FESCO (Foreign Enterprise Service Company) to make their entry into the Chinese market much simpler. First off, a FESCO is fully established and licensed in China as a legal entity.
A FESCO in China can provide local compliance of the Chinese system, navigating through China’s HR and employment requirements by outsourcing and managing all administrative procedures. So, how can a FESCO assist your company? There are two ways, the one to choose depends on your company’s legal situation in China.
Companies without a Legal Entity in China
Many foreign companies only need to hire employees in China during the initial stage. A FESCO is a great solution for these companies as it provides employment solutions; a total employment package that embraces all employment liabilities. From the signature of a local compliant contract to payroll, from mandatory benefits administration to tax contributions, as well as visa processing and other optional features such as expense claim management or medical insurance, using a FESCO is an inclusive solution.
Furthermore, the use of a FESCO’s Employment Solutions enables foreign companies to increase or decrease their employee headcount in China with high flexibility, as the procedure is simplified to onboarding new employees or terminating them through the local FESCO Chinese agency.
In addition, this market entry model is fully compatible with longer-term plans for companies wishing to setup a foreign-owned company (WFOE), as all employment relationship can be transferred from the Chinese FESCO agency to the new foreign entity.
Companies with a Legal Entity in China
A FESCO agency in China can also act as a strong local partner for any company that already has a legal entity in China (WFOE). The compliance of the various administrative requirements imposed by the Chinese authorities in such a constantly-changing market may result in a challenging task for foreign companies.
How can a FESCO in China support foreign companies?
Supporting All HR Requirements in China
Regional HR laws and regulations must be taken into consideration when conducting payroll and taxation operations in China. The taxation system changes frequently and can be especially confusing for foreign companies, so local knowledge is valuable and recommended.
Individual Income Tax
Recently, several changes were made to China’s Individual Income Tax (IIT) laws. These changes were made to simplify the rules and provide tax breaks to those struggling to keep up with China’s rapidly growing cost of living, as well as increase consumption during a time of slow international trade growth for China. Unfortunately for foreign and higher income employees, the new laws take a tougher stance.
For simplicity’s sake, here is the formula to calculate IIT in China:
The standard deduction has increased for both non-resident and resident taxpayers. It used to be RMB 4,800 and RMB 3,500 respectively, it is now a unified RMB 5000 per month, meaning that the total annual deduction is now RMB 60,000.
There are additional special deductions available:
- Housing rent (RMB 18,000, RMB 13,200, or RMB 9,600 per year, depending on the city);
- Education expenses for children (RMB 12,000 per year per child);
- Expenses for further self-education (RMB 4,800 or RMB 3,600 per year, depending on the city);
- Housing loan interest (RMB 12,000 per year);
- Healthcare costs for serious illness (Bill from the hospital must be from RMB 15,000 per year to RMB 80,000 per year);
- Support for the elderly (RMB 12,000 to RMB 24,000 per year, depending on whether support is given individually or with help from siblings).
There is also a new charity deduction, if an individual donates up to 30% of their income to certain causes, this amount can be deducted from their taxable income.
The new IIT regulations also provide incentives for certain types of income. Income from labor services, income from royalties, and income from author’s remuneration are given a 20% discount prior to being calculated in someone’s pre-tax income. The author’s remuneration will be subject to an additional 30% discount.
Below is a table explaining the tax brackets, put in terms of yearlong income:
From this table, it is apparent that the lower brackets have been widened, while the upper brackets remain unchanged. This means that a greater amount of people will have a lower IIT rate. However, for most foreigners, their IIT rate will remain the same, although they can still take advantage of the new deductions.
Social Security’s Mandatory Contributions
Mandatory benefits are an important factor of employee compensation in China, but the process of administering them is far from simple.
In China, social security is divided into two parts: one is social insurance (composed of 5 types of insurances) and the second is the housing fund.
The five social insurances are:
- Pension – Both employee and employer should contribute. Employee’s part goes into a personal account and is considered personal property, so it is inheritable. A pension cannot be drawn on until after the employee has worked for 15 years.
- Medical – Heavily subsidized by the state, although the employee and employer still contribute. It does not cover all expenses or treatments, and an employee’s dependents are not covered.
- Unemployment – This is obligatory insurance in China, and it can cover unemployed urban workers for up to 24 months. It is funded by both employee and employer contributions.
- Work injury – This is covered completely by the employer. It covers medical expenses, as well as wages for up to 12 months.
- Maternity – Also funded by the employer. Covers medical expenses and loss of earnings for no less than 90 days.
The Housing Fund
The housing fund was created by the government in 1999. It differs from the other social insurance because employees do not draw on a pool of money, instead contributing to their own personal fund.
Employers and employees usually contribute evenly to the fund, each contributing anywhere between 5% to 25%. This is mandated by the Chinese government, and if employers do not set one up or contribute to it, they will be fined. Employees can pull money from this fund for house ownership purposes, but not for paying rent. When employees retire, they can withdraw the full amount and use it however they want.
- The contributory rates vary from city to city and from employer to employer, so an accurate understanding of the appropriate local laws is crucial. Contributions may vary based on China’s Hukou system of registration, so employers should make sure they are aware of the relevant rules.
A FESCO can help with the immigrational process required by Chinese authorities. A work visa application in China is a synonym to a lengthy and complex procedure due to the increasingly difficult requirements imposed. In addition to obtaining a residence permit, all foreign employees must also have valid work permits. The work permit process is complex, with three and corresponding requirements. A FESCO can make sure employees’ applications are correct and submitted smoothly.
HROne as a FESCO
There are many different Foreign Enterprise Service Company options out there for foreign companies entering China. A clear standout from the rest is HROne. This company has many years of experience helping companies from a variety of industries enter the Chinese market.
We specialize in walking companies through the whole process, from the initial start into the long-term support phase. Even before you even have a legal entity in China, we can hire the employees to get operations started. Then, when you are further along in the process and have your own legal entity, we can manage your employees’ full payroll liabilities, from disbursing monthly salaries to complying with the individual income tax and social security contributions.
Doing administrative tasks in China can be time-consuming and confusing, and so many foreign companies choose to let an established provider take care of those services for them.
To put things simply, a FESCO is an entity to which foreign companies can outsource HR and administrative procedures, whether they have a legal entity registered in China or not.
The use of a FESCO in China guarantees local compliance and mitigates any possible risks that could arise from a mistake, in addition to the time saved compared to managing everything on one’s own. The Chinese market is glowing with opportunities for foreign companies. With the proper legal structures in place, your company’s expansion into China is set up for success. Contact us to get started!