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Foreigners working in Shanghai must be enrolled in Chinese Social Insurance System

The lifting of COVID restrictions in China opened the possibility for foreign professionals to start or resume commercial activities in the country, while companies based in China welcomed foreign employees back. The resumption of normal labor activities means that employers are now expected to comply with social insurance requirements.

As one of the largest and most populous countries in the world, China has a unique social security system that can be complex and challenging to navigate for both employers and employees. In the past, foreign employees were not forced to contribute to the social insurance system, but since August of 2021 contributions are mandatory.

China’s social security law was promulgated by the central government, but its administration and specific details are governed by local authorities. For instance, for each benefit, the employee and employer contributions rates and base differ as per the local jurisdiction and are subject to annual changes and reforms.

What makes the payroll in China so complex is that the contribution rates for social insurance and housing fund are updated every year and change according to city jurisdiction. Beijing, Shanghai, and Guangzhou have different contribution rates.

The current laws clearly indicate that, effective October 2011, employers are obliged to enrol foreign employees working in China (including those working in Shanghai) into local statutory social insurance schemes. However, such requirements used to be considered “non-mandatory” in Shanghai.

For these reasons, some HR departments and legal professionals are under the wrong impression that social insurance contributions for foreigners in Shanghai are still optional.

In 2009, the Shanghai Municipal Human Resources and Social Security Bureau issue the Document No. 38 to offer non-Chinese nationals working in Shanghai the opportunity to participate voluntarily in the statutory pension, medical and unemployment insurance schemes in the city.

Before the Social Insurance Law and the Interim Measures for the Participation in Social Insurance of Foreigners Employed in China took effect in 2011, foreign employees were not allowed to participate in any statutory social insurance schemes.

The Shanghai No. 38 Document became “controversial” because under this local document, it was optional for foreign employees to participate in the three statutory social insurance schemes, which contradicted national legislation.

However, this document was confirmed by the Shanghai authorities in 2016 and continued to be “applicable” until August 15, 2021. Since that date, more employers in Shanghai have started to make payments.

According to local authorities, employers in Shanghai that have yet to pay social insurance for their foreign employees risk potential legal issues, such as being requested by the foreign employees (whether current or former employees) to make back payments, paying late fees or being liable for the social benefits that the employees would have otherwise enjoyed.

A foreign employee may terminate his/her employment and claim statutory severance pay on the grounds that the employer failed to pay social insurance for him/her.

Companies in Shanghai planning to hire foreign professionals, or those who have hired them but have yet to pay social insurance, should make an informed decision and seriously consider social insurance enrolment.

At the same time, factors such as if there is any adverse impact on foreign employees’ individual income taxes in China arising from their enrolment in social insurance, and whether the employer will bear the employee’s portions of contributions and how it may claim these back when the foreign employees leave China should be evaluated.

There are a set of rules and laws that every employer in China must abide by while considering the recruitment of local or foreign employees.

China’s Social Security System consists of 5 mandatory insurance schemes (pension fund, medical insurance, industrial injury insurance, unemployment insurance, and maternity insurance) + a housing fund (only applicable to Chinese employees).

The contribution to China’s social security system is mandatory for Chinese employees and their employers as well as foreigners employed in China. It will be considered illegal if a company does not provide any social insurance for its employees.

China’s Pension Insurance is an important aspect of the country’s social security system because it offers financial support to retired individuals who have reached the age of 60, as well as to those who are unable to work due to disability or illness. The pension system in China is funded by both employers and employees, with contributions made throughout an individual’s working life.

The basic pension scheme in China is divided into two parts: the enterprise annuity scheme and the social security scheme. The enterprise annuity scheme is a supplementary pension scheme that is voluntary for employers and employees to participate in. The social security scheme, on the other hand, is mandatory and provides basic protection to all eligible individuals.

The social security scheme is further divided into five parts: pension insurance, medical insurance, unemployment insurance, work injury insurance, and maternity insurance. The pension insurance component provides a monthly pension to eligible individuals who have contributed to the scheme for a certain number of years. The amount of the pension is based on an individual’s average monthly salary and the number of years they have contributed.

In recent years, China has been facing a demographic shift as its population ages. This has put pressure on the country’s pension system, with concerns about its long-term sustainability. To address these concerns, the Chinese government has introduced reforms to the pension system, such as increasing the retirement age and encouraging more people to participate in the enterprise annuity scheme.

In general, individuals need to pay at least 15 years of contributions prior to receiving a pension in China. Some industries have different retirement ages, but mainly men are 55 years old, women are 50 years old (blue-collar work), men are 60 years old, and women are 55 years old (white-collar work). The amount of retirement benefits depends on local regulations. Due to China’s population problems, these ages may soon change. To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.


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