Introduction
For Japanese companies dispatching employees to China and companies establishing local subsidiaries in China to employ foreign staff, one of the important compliance matters alongside individual income tax is the response to the social insurance system.
In China, there is an obligation for foreign personnel to join the Chinese social insurance system under certain circumstances. On the other hand, a "Japan-China Social Security Agreement" has come into effect, which provides a mechanism to avoid double enrollment in the pension system for expatriates who meet certain requirements.
However, there are many misunderstandings such as "foreigners do not have to join China's social insurance" and "all social insurance premiums are exempted due to the Japan-China Social Security Agreement." In reality, it is necessary to consider the applicable insurance systems, required procedures, and the operational practices of local governments, making the system far from simple.
This article will organize the legal basis regarding the social insurance system for foreign personnel in China, as well as explain the exceptions under the Japan-China Social Security Agreement and practical points that companies should be aware of.
1. Obligation for Foreign Personnel to Join Social Insurance in China
In China, a nationwide unified social insurance system was established by theSocial Insurance Lawenforced on July 1, 2011. Article 97 of the law stipulates that foreigners working in China must also join social insurance in accordance with relevant Chinese regulations.
In response to this, the Ministry of Human Resources and Social Security announced the "Interim Measures for Foreigners Employed in China to Participate in Social Insurance (Order No. 16 of the Ministry of Human Resources and Social Security)" in 2011, which came into effect on October 15, 2011. According to these interim measures, it is generally required that foreign personnel legally working in China are obligated to join social insurance just like Chinese employees.
The social insurance that must be joined generally consists of five types: basic pension insurance, basic medical insurance, unemployment insurance, work-related injury insurance, and maternity insurance. The insurance premium rates and the burden ratios for companies and employees are not uniform across the country, but are operated according to the standards set by local governments such as Beijing, Shanghai, and Shenzhen.
Therefore, companies employing foreign employees are required to confirm the social insurance system for each work location and carry out the enrollment procedures, just like they do for Chinese employees.
However, there have been certain differences in the operation by region since the establishment of the system, with some areas actively implementing the enrollment practices for foreign personnel, while in other regions, there have been periods when enrollment was not thoroughly enforced. However, in recent years, the collection system for social insurance has been improved, and there is a trend towards stricter verification of enrollment for foreign personnel. Therefore, it is not appropriate to design the system solely based on traditional practices, and responses that take into account the latest local practices are required.
2. Exemption from the Pension System under the Japan-China Social Security Agreement
However, Japanese expatriates working in China are not always required to fully join the Chinese social insurance system.
Between Japan and China, the Japan-China Social Security Agreement came into effect on September 1, 2019, and a system has been established to avoid double enrollment in the pension system for expatriates who meet certain conditions. The purpose of the social security agreement is to prevent the double burden of having to pay pension insurance premiums in both Japan and China for the same employment, as well as to prevent disadvantages to future pension eligibility due to short-term overseas assignments. To be eligible for this agreement, one must be dispatched from a Japanese company to China for a certain period and continue to be enrolled in the Japanese Employees' Pension Insurance system, among other requirements set by the agreement. Additionally, it is not sufficient to merely meet the requirements; it is necessary to obtain a **Certificate of Coverage** issued by the Japan Pension Service and submit it to the Chinese side.
It is important to note that the Japan-China Social Security Agreement does not exempt all social insurance systems in China. The agreement primarily targets the old-age pension system (basic pension insurance), and for medical insurance, work-related injury insurance, unemployment insurance, etc., it is necessary to determine the obligation to enroll based on Chinese domestic law and the operations of each local government.
This point is often misunderstood in practice, and there are cases where it is understood that "because there is a social security agreement, there is no need to pay any social insurance premiums in China." However, in reality, the scope of exemptions under the agreement is limited, and if a Certificate of Coverage is not obtained, there is a possibility that enrollment in the pension system will be required by the Chinese side.
3. Obtaining the Certificate of Coverage and Practical Considerations for Companies
To be eligible for the Japan-China Social Security Agreement, in addition to being an expatriate covered by the agreement, it is necessary to obtain and submit a "Certificate of Coverage" issued by the Japan Pension Service to the Chinese side.
The certificate of applicability is an official document that proves continuous enrollment in Japan's Employees' Pension Insurance system and serves as an important basis for receiving an exemption from participation in the pension system in China. Therefore, the mere fact of being dispatched from a Japanese company does not apply the social security agreement, and obtaining and keeping the certificate of applicability is essential.
Under the Japan-China Social Security Agreement, the usual duration of dispatch is within 5 years. It is recognized that the continuation of participation in the Japanese pension system is based on this premise. Additionally, in cases where the dispatch period exceeds 5 years due to unavoidable circumstances, a system is also established that allows for the extension of the applicable period based on the agreement of the relevant authorities from both Japan and China.
However, if you have not obtained the applicable certificate or have forgotten to complete the acquisition procedures after being dispatched to China, there is a possibility that you will be required to join the pension system by the Chinese side. Therefore, it is advisable to start the application process with the Japan Pension Service as early as possible after the decision for overseas assignment.
Furthermore, in China, the status of social insurance participation is closely related to foreign employment permits and human resources and payroll management, so it is important for the human resources department, payroll department, and tax department to work together to establish a system for continuous management of the timing and status of the applicable certificate's renewal.
4. Housing Provident Fund (住房公积金) and Local Operational Considerations
When considering systems related to foreign personnel, it is necessary to pay attention to the handling of the Housing Provident Fund (住房公积金) alongside social insurance.
The Housing Provident Fund is a separate system from China's social insurance system, established to support housing purchases and mortgage repayments. While participation is mandatory for Chinese employees, there is no uniform treatment for foreign personnel, and the operation of the system varies by local government.
For example, in some regions, participation is allowed for foreign personnel, while in other regions, they may be treated as ineligible for participation, or there may be systems that allow participation based on the wishes of the company and the individual.
Thus, in China, it is not appropriate to understand that "the same system applies nationwide" for both the social insurance system and the Housing Provident Fund system, as local governments have a certain degree of discretion.
Moreover, there are differences in the calculation methods for social insurance contribution rates and standard monthly remuneration across regions, so companies operating in multiple regions in China are required to confirm the system details for each work location.
In recent years, information sharing between tax authorities and social insurance collection agencies has progressed, and cases of verifying the consistency between payroll data and social insurance participation status are increasing. Therefore, it is important to build a compliance system that manages human resources, payroll, and tax in an integrated manner rather than managing social insurance and personal income tax as separate systems.
5. Conclusion
The social insurance system for foreign personnel in China does not mean that "foreigners are not obligated to participate"; rather, based on the Chinese Social Insurance Law and the Interim Measures for Foreigners Participating in Social Insurance in China, foreign personnel working in China are generally required to participate.
On the other hand, expatriates dispatched from Japanese companies to China may be exempt from participating in the basic pension insurance in China under certain conditions as per the Japan-China Social Security Agreement. However, obtaining the applicable certificate is essential to receive this exemption, and the exemption does not apply to all social insurance systems in China.
Furthermore, since there are regional differences in the Housing Provident Fund and local social insurance operations, it is not appropriate to understand the system uniformly across the country, and it is necessary to design the system based on practical confirmations for each work location.
The human resources and payroll system in China is an area where social insurance, personal income tax, labor law, and foreign employment management systems are interrelated, and changes in one system can often affect compliance in others. Therefore, companies employing foreign employees or dispatching expatriates to China should continuously check the latest laws and local practices, and review the overall payroll and social insurance systems from a comprehensive perspective, which is believed to lead to a reduction in future tax and labor risks.
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