A few hundred thousand foreign professionals call Shanghai home. Attracted by the city’s international profile and cosmopolitan character, many arrive to this place to live and work. Unlike other major cities in China, until August 2021, expats were not required to make contributions to the local security insurance system. However, this may soon change.
In 2009, Shanghai issued a policy notice (Circular No. 38) stating that foreigners working in Shanghai "may" contribute to the social security scheme in China. This was the first time that foreigners could start contributing, but it was not mandatory.
The Circular stipulated that foreign employees in Shanghai may, in accordance with the relevant provisions, participate in the basic endowment insurance, basic medical insurance for urban employees and work-related injury insurance.
Because the clause uses the word “may” instead of “shall”, and the payment of social insurance should be stipulated in the labor contracts in advance, it may be interpreted that foreign employees in Shanghai do not need to pay social insurance.
Nevertheless, in 2011 a national law was passed stating that all employers and employees – including foreigners – must contribute to the social security system (contributions to the housing fund remain voluntary for foreign nationals).
While national law supersedes local policies and the rest of China made contributions mandatory for foreigners, Shanghai authorities decided not to enforce it and continued to regard contributions by foreigners as voluntarily based on Circular No. 38. This notice was extended in 2016, but finally it expired on 15 August 2021.
Of course, the question rises whether it is now mandatory for foreigners to pay social insurance, but no official document or notification has confirmed this yet. Companies hiring foreign employees in Shanghai should wait for an official notice before executing any radical changes.
Taking into consideration the impact of social insurance on the labor cost, the calculation of individual income tax (IIT), as well as the compliance of human resources (HR) management, companies should understand how China’s social insurance system work and be prepared to adjust.
In 2011, the Chinese government created a comprehensive national framework under the Social Insurance Law, in which the basic principles of the social security system are outlined.
It also states that 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.
Although there are national guidelines, local governments manage the specifics and administration of the system. That is to say, the contribution base, the contribution rates, the social insurance registration, as well as other compliance requirements, might be different from one city to another.
For example, in 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 require foreign employees to contribute towards social insurance.
Social insurance exemptions can be applied for the eleven countries that have a bilateral agreement with China. Expatriates from Germany, South Korea, Denmark, Canada, Finland, Switzerland, the Netherlands, Spain, Luxembourg, Japan, and Serbia are eligible for social security exemptions.
The principle is that a national of one of these countries should not have to make contributions both in China and at home. If they continue to make relevant social insurance payments in their home country, then they (and their employers) can be exempt from doing so in China.
When living in China, foreigners covered in the social insurance system are entitled to benefits of basic medical insurance, work-related injury insurance, and maternity insurance, according to the regional implementation policy. There are usually no unemployment benefits for foreign employees as a foreigner without permanent residency cannot work in China.
Foreign employees -the same as Chinese-, who have contributed to the pension fund for 15 years or longer and have reached the legal retirement age in China (60 years for men and 55 years for women) can start receiving a monthly retirement income, even when living outside of China. The only difference is that if they live abroad, they must submit every year a document of living proof issued by a Chinese embassy or consulate to the social insurance agency that pays the benefits.
If a foreigner leaves China before reaching the legal retirement age, the social insurance individual account will be retained and will be renewed on a cumulative basis when the person returns to work in China.
Foreigners can apply to terminate their social insurance individual account before departing the country and receive the amount remaining in the account in a lump sum.
In China, companies must register their employees with the local Social Insurance Bureau to initiate or reactivate their corresponding accounts. Although both employer and employee are obligated to make contributions, it is generally the employer’s responsibility to correctly calculate and withhold the payments.
The employee personal contribution is set as a percentage of the monthly gross salary. The employer part is calculated as a percentage of the monthly gross salary and paid on top of that salary.
The part contributed by the employer is paid into the social insurance system and is therefore a sunk cost. This contribution will increase the company's cost of the employment, without any direct benefit to either the employer or the employee.
In Shanghai, it is currently optional for employers to contribute the maternity and workplace parts of the social security insurances for their foreign employees. Whether this practice continues remains to be seen.
The base figures for social security contributions have floors and ceilings. Generally, the contribution base is capped at 300 percent of the average local salary. And the minimum contribution base is usually decided either by the local minimum wage or a certain percentage of the average local wage.
In Shanghai, starting from July 2021, the maximum social insurance contribution base was raised to RMB 31,014 (US$4,788), and the minimum contribution base was raised to RMB 5,975 (US$922).
In China, social insurance premiums contributed by the employee can be deducted from the gross salary when calculating the IIT liabilities.
Despite that foreign employee’s IIT liability can be alleviated due to the social insurance contribution, the saved tax cannot compensate for the paid social insurance. That is to say, the employee’s take-home pay will be less.
It is still a possibility that the Shanghai authorities decide to extend the implementation of the Notice that exempts foreigners from mandatory social insurance participation. If so, foreign employees can continue to enjoy the current social insurance exemptions.