Introduction
When calculating individual income tax in China for expatriates from Japanese companies, one often overlooked item is the social insurance premiums paid by the company in Japan and other countries.
Salaries subject to taxation in China are not limited to the salaries actually paid to the individual within China.
According to Chinese individual income tax law, "salary and wage income (工资、薪金所得)" includes not only salaries, bonuses, and allowances, but also other income obtained in connection with employment or position.
Therefore, expenses borne by the overseas headquarters may also need to be included in the calculation of individual income tax in China, depending on their nature.
There are clear tax exemption provisions regarding social insurance in China.
The statutory social insurance in China is relatively clear.
According to the Ministry of Finance [2006] No. 10, individual income tax is exempt for the basic pension insurance, basic medical insurance, and unemployment insurance actually paid by enterprises or business units according to the ratios and methods set by the national or provincial government.
On the other hand, for the portion paid by enterprises or individuals that exceeds the prescribed ratios or standards, that excess portion is included in the employee's current salary and wage income for the calculation of individual income tax.
In other words, regarding the domestic system in China, social insurance within the statutory scope = tax-exempt is an explicit system. The question is whether this same concept can be applied to foreign social insurance.
The previous provisions excluding "social insurance borne by companies under foreign law"
have undergone very particularly changes in the system in China.
The National Tax Administration's National Tax Notice [1998] No. 101 states that the overseas insurance premiums borne by companies for employees working in China are, in principle, included in salary and wage income, while the costs of a social security nature that employers are required to bear under foreign laws were recognized as not included in the taxable income of employees under certain conditions.
In other words, the former Chinese tax system had a provision that recognized the idea that "this is not additional compensation for employees, but a social security burden imposed on the employer by foreign law."
However, the provisions regarding individual income tax in National Tax Notice [1998] No. 101 were abolished in 2011, and the notice itself was fully abolished in 2023.
Therefore, it cannot be assumed that "since the welfare pension premiums borne by the company under Japanese law are naturally tax-exempt in China."
There is an explicit tax exemption system for statutory social insurance in China under Financial and Taxation [2006] No. 10, but it cannot be assumed that this provision can be directly extended to foreign social insurance.
In cases where there is company-borne social insurance in Japan,
let's consider a case where the Japanese headquarters continues to bear the Japanese welfare pension for Japanese expatriates working in China.
Assuming the salary is as follows.
- Salary paid by the local Chinese subsidiary
- Salary paid by the Japanese headquarters
- Employee's share of social insurance in Japan
- Company's share of social insurance in Japan
- Corporate pension
- Private medical insurance, life insurance, etc.
These should not all be treated the same.
In particular, the company's share of statutory social insurance in Japanandthe private insurance and corporate pension that the company voluntarily participates in have different natures in their systems.
However, there is no current comprehensive provision that automatically exempts foreign law Employer Contributions from taxation solely for that reason under Chinese individual income tax.
Therefore, in practice, it is necessary to individually confirm whether each item included in overseas payroll calculations corresponds to salary and wage income or if there are applicable tax-exempt provisions under current law.
The perspectives in Japan and China are not necessarily the same.
The reason this issue is particularly difficult is that there may be different evaluations for the same social insurance premiums for income tax purposes in Japan and China.
In Japan, it is important to distinguish whether the social insurance premiums are legally borne by the company itself or if the company is covering the premiums that should be borne by the employee.
In contrast, in China, while there are explicit tax exemption provisions for domestic statutory social insurance, the special tax-exempt treatment that previously existed for foreign social insurance has now been abolished.
Therefore, it is not necessarily true that "if it is not considered salary in Japan, it is not considered salary in China," or conversely, "if it is included in salary in China, it is considered salary in Japan." In cross-border payroll, it is necessary to reconstruct taxable salary in each country.
Items to be confirmed in expatriate payroll
In calculating the personal income tax for expatriates in China, it is important to check not only the monthly Cash Salary but also at least the following items.
- Domestic salary in China
- Salary and bonuses paid by the overseas headquarters
- Housing and other in-kind benefits
- Tax Equalization / Tax Reimbursement
- Employee contribution to foreign social insurance
- Company contribution to foreign social insurance
- Corporate pension / retirement pension
- Private health insurance / life insurance
- Stock Options, RSUs, and other Equity Compensation
Especially for expatriates from Japanese companies, it is important not to use the "total amount paid" from the Japanese Payroll directly as the taxable salary in China, but to map how each item from the Japanese Payroll is treated under Chinese personal income tax. This is crucial.
At Mochizuki Consulting, we focus on expatriates from Japanese companies, handling personal income tax declarations in China, taxation of overseas salaries, social insurance, Tax Equalization, and the calculation of personal income tax for both Japan and China, after reviewing the Payrolls from both sides.
*This article is intended to provide general information. The treatment of foreign social insurance premiums under Chinese personal income tax needs to be individually assessed based on the applicable systems, the burden relationship between the company and employees, salary structure, work location, number of days of residence, etc.
View the details of our Chinese Individual Income Tax Services.