Careful consideration must be given to how you structure salary packages for each job role in companies based in China. Certain employees will need to be given incentives, while others will require a more fixed form of renumeration.
It is also important to consider how much income tax each staff member will be required to pay based on their proposed salary package, especially if it is a net package.
Base salary and bonuses
An employee’s base salary must be stated in their employment contract. This based salary comprises the fixed monthly amount that the company guarantees to pay them.
But employers can also include one-off payments. For example, many make a 13th month salary payment to their staff around the time of Chinese New Year.
Companies should be careful about including payments that are separate from base salary in the labour contract, however, as they will be legally bound to make them. Instead, it might make more sense to make such payments as an annual bonus. In this instance, employers can clarify that the bonus will be paid if the business performs well or adequately, but not if performance is below expectations.
It is also possible to pay bonuses at various points throughout the year. In this case, it is important to be aware that under Chinese Individual Income Tax (IIT) legislation, employees can benefit from special tax treatment for a one-off annual bonus, thereby reducing their tax burden.
Allowances
The Chinese Tax Bureau allows foreign staff, including those from Hong Kong, Macau and Taiwan, to deduct certain “allowances” before calculating the tax burden on their monthly salary, provided that:
- In their employment contract, and sometimes also in a board resolution depending on the location of the company, there is a clear reference to the amount being paid to the employee under the title of each specific allowance;
- Each month, the employee in question produces evidence to show their employer that the “allowance” was spent on the services described in the contract - this is done using the ubiquitous “fapiao”, or official invoice, which should be received whenever an official monetary transaction is completed in China.
Generally, the following allowances are tax-deductible:
- Meals: Foreign employees are allowed to deduct a certain amount spent on meals each month from their taxable income. Most of the fapiaos submitted in this context will be issued by restaurants, but a portion can also come from supermarkets. The fapiao should state that the purchased goods were “meals” or “food”;
- Housing: The sum spent on renting an apartment may also be deducted. But please be aware that private landlords will often be reluctant to issue an official fapiao because, in order to obtain one, they must pay a percentage of the rental amount they receive to the Tax Bureau. If a fapiao is requested, the landlord will likely charge a large premium on top of the originally negotiated rental figure. Foreign workers needing a fapiao should negotiate the situation with their landlord before signing a rental contract and their requirement for a fapiao should be clearly mentioned in the agreement. Foreign employees living in serviced residences will not face this problem as they will be managed by companies that can issue fapiaos;
- Laundry: This consists of an allowance for dry cleaning clothes;
- Children’s education: Foreign staff can deduct some of the cost of studying Chinese themselves, or educating their children. But this education must be received in China and, as with other allowances, a fapiao is required;
- Home visits: Each year, foreign employees are allowed to deduct the cost of one or two return flights, usually up to business class, back to their home country. Flights to other destinations are not normally accepted. The same applies to hotels and other expenses as it is a home visit rather than a vacation allowance.
How much of a foreign employee’s salary is covered by allowances is not clearly defined by law, which only stipulates that they should be “reasonable.” But in practice, many companies assign about 30% of a foreign worker’s total salary to this category. As the possibility always exists that the tax office could challenge the situation, it is recommended that the proportion of each allowance be set at, or below, this level.
Mandatory social security benefits
Another portion of the salary package includes mandatory benefits (social security), which are often referred to as “social insurance” and the “housing fund” in China.
Contributions here are made both by employees and employers. The employee’s chunk is deducted from their gross salary. The proportions and maximum contributions made by both parties vary depending on where the business is located.
Some employers also choose to enroll their staff in additional pension plans or other forms of wealth accumulation plan. While doing so is perfectly legal, be aware that only mandatory benefits as specified in IIT legislation may be deducted before calculating IIT, unless otherwise stipulated by law.
Defining net salary
Normally, “net” salary is defined as the amount employees receive each month after paying IIT and mandatory benefits. It is most commonly offered to blue-collar workers who may not always understand the finer details of Chinese social insurance or IIT systems.
As a result, misunderstandings between managers and staff over the definition of “net” salary are commonplace. Therefore, if the aim is to offer one, it makes sense to draw up clear examples to explain how the salary package of each employee will be structured. Workers should also be helped to understand how much money they will take home each month.
To work this figure out, it is necessary to add their entire base salary, allowances, bonuses, non-mandatory pension plans and the employer’s portion of social insurance contributions together to come to the total amount of compensation and benefits.
This article was first published on China Briefing.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.
Careful consideration must be given to how you structure salary packages for each job role in companies based in China. Certain employees will need to be given incentives, while others will require a more fixed form of renumeration.
It is also important to consider how much income tax each staff member will be required to pay based on their proposed salary package, especially if it is a net package.
Base salary and bonuses
An employee’s base salary must be stated in their employment contract. This based salary comprises the fixed monthly amount that the company guarantees to pay them.
But employers can also include one-off payments. For example, many make a 13th month salary payment to their staff around the time of Chinese New Year.
Companies should be careful about including payments that are separate from base salary in the labour contract, however, as they will be legally bound to make them. Instead, it might make more sense to make such payments as an annual bonus. In this instance, employers can clarify that the bonus will be paid if the business performs well or adequately, but not if performance is below expectations.
It is also possible to pay bonuses at various points throughout the year. In this case, it is important to be aware that under Chinese Individual Income Tax (IIT) legislation, employees can benefit from special tax treatment for a one-off annual bonus, thereby reducing their tax burden.
Allowances
The Chinese Tax Bureau allows foreign staff, including those from Hong Kong, Macau and Taiwan, to deduct certain “allowances” before calculating the tax burden on their monthly salary, provided that:
- In their employment contract, and sometimes also in a board resolution depending on the location of the company, there is a clear reference to the amount being paid to the employee under the title of each specific allowance;
- Each month, the employee in question produces evidence to show their employer that the “allowance” was spent on the services described in the contract - this is done using the ubiquitous “fapiao”, or official invoice, which should be received whenever an official monetary transaction is completed in China.
Generally, the following allowances are tax-deductible:
- Meals: Foreign employees are allowed to deduct a certain amount spent on meals each month from their taxable income. Most of the fapiaos submitted in this context will be issued by restaurants, but a portion can also come from supermarkets. The fapiao should state that the purchased goods were “meals” or “food”;
- Housing: The sum spent on renting an apartment may also be deducted. But please be aware that private landlords will often be reluctant to issue an official fapiao because, in order to obtain one, they must pay a percentage of the rental amount they receive to the Tax Bureau. If a fapiao is requested, the landlord will likely charge a large premium on top of the originally negotiated rental figure. Foreign workers needing a fapiao should negotiate the situation with their landlord before signing a rental contract and their requirement for a fapiao should be clearly mentioned in the agreement. Foreign employees living in serviced residences will not face this problem as they will be managed by companies that can issue fapiaos;
- Laundry: This consists of an allowance for dry cleaning clothes;
- Children’s education: Foreign staff can deduct some of the cost of studying Chinese themselves, or educating their children. But this education must be received in China and, as with other allowances, a fapiao is required;
- Home visits: Each year, foreign employees are allowed to deduct the cost of one or two return flights, usually up to business class, back to their home country. Flights to other destinations are not normally accepted. The same applies to hotels and other expenses as it is a home visit rather than a vacation allowance.
How much of a foreign employee’s salary is covered by allowances is not clearly defined by law, which only stipulates that they should be “reasonable.” But in practice, many companies assign about 30% of a foreign worker’s total salary to this category. As the possibility always exists that the tax office could challenge the situation, it is recommended that the proportion of each allowance be set at, or below, this level.
Mandatory social security benefits
Another portion of the salary package includes mandatory benefits (social security), which are often referred to as “social insurance” and the “housing fund” in China.
Contributions here are made both by employees and employers. The employee’s chunk is deducted from their gross salary. The proportions and maximum contributions made by both parties vary depending on where the business is located.
Some employers also choose to enroll their staff in additional pension plans or other forms of wealth accumulation plan. While doing so is perfectly legal, be aware that only mandatory benefits as specified in IIT legislation may be deducted before calculating IIT, unless otherwise stipulated by law.
Defining net salary
Normally, “net” salary is defined as the amount employees receive each month after paying IIT and mandatory benefits. It is most commonly offered to blue-collar workers who may not always understand the finer details of Chinese social insurance or IIT systems.
As a result, misunderstandings between managers and staff over the definition of “net” salary are commonplace. Therefore, if the aim is to offer one, it makes sense to draw up clear examples to explain how the salary package of each employee will be structured. Workers should also be helped to understand how much money they will take home each month.
To work this figure out, it is necessary to add their entire base salary, allowances, bonuses, non-mandatory pension plans and the employer’s portion of social insurance contributions together to come to the total amount of compensation and benefits.
This article was first published on China Briefing.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.
