New Development Of PRC Social Insurance: Foreign Investors And Expatriates Beware

Friday, November 18, 2011 - 13:08

After being reviewed four times in three years, the Social Insurance Law of the People’s Republic of China (the “Social Insurance Law”) was finally adopted by the Standing Committee of the National People’s Congress of China on 28 October 2010. Its implementation rules (the “Implementation Rules”) were subsequently released by the Ministry of Human Resource and Social Security (“MHRSS”) on 29 June 2011. Both the Social Insurance Law and the Implementation Rules came into force on 1 July 2011. The Social Insurance Law consolidated and standardised the social insurance system in China, which consists of five major types of social insurance, namely: basic pension insurance, basic medical insurance, work injury insurance, unemployment insurance and maternity insurance.

Whilst the Social Insurance Law sets down the general principle that a foreigner working in China shall participate in the social insurance scheme by referring to the provisions thereunder, there still remain uncertainties as to the extent to which the provisions under the Social Insurance Law shall be applied to foreigners working in China. A bone of contention is whether it is compulsory or voluntary for foreigners working in China to participate in the PRC social insurance scheme. This issue receives particular attention as compulsory participation in the PRC social insurance scheme will not only increase the costs of hiring foreign employees in China but will also potentially lead to double contribution, as many foreign employees may already be covered by commercial insurance which may overlap with part or all of the five types of statutory social insurance coverage in China. On the other hand, for foreigners working in China under secondment arrangements, their overseas employers may be obliged to continue to contribute to the social insurance schemes for them in their home countries. 

In response to the aforementioned uncertainties, the MHRSS later issued the Interim Measures on Participation in Social Insurance by Foreigners Working in China (the “Interim Measures”) on 6 September 2011, which came into force on 15 October 2011. The draft of the Interim Measures was previously released for public comment on 10 June 2011. Despite the various controversies during the consultation period, the Interim Measures finally adopted the principle that foreigners working in China (except for nationals of foreign countries that have entered into bilateral or multilateral social insurance exemption treaties with China) are obliged to participate in the PRC social insurance scheme.

The aim of this article is to highlight the principal requirements pertaining to the participation in the PRC social insurance scheme by foreigners working in China to date and to share the authors’ observations and practical experience in this regard.

1. Who Pays?

Foreign Employee(s)” are defined under the Interim Measures as those non-PRC nationals who hold (a) work permits (e.g., Alien Work Permit, Foreign Expert Certificate and Resident Foreign Journalists Certificate) and alien residence permits, or (b) an Alien Permanent Residence Permit, and are lawfully employed in China, including:

  1. foreigners who are legally employed by enterprises, public institutions, social groups, privately owned non-enterprise units, foundations, law firms and accounting firms etc., lawfully incorporated or registered in China (“PRC Employer(s)”); and 
  1. foreigners who enter into employment contracts with overseas employers and are then seconded to work in branches or representative offices lawfully incorporated or registered in China (“PRC Host Unit(s)”).

The Foreign Employee and the PRC Employer/PRC Host Unit shall respectively be responsible for the employee’s portion and the employer’s portion of the social insurance contribution.

According to the Interim Measures, nationals of foreign countries that have entered into bilateral or multilateral social insurance exemption treaties with China can be exempted from participation in all or part of PRC social insurance scheme. As of the date of this article, Germany and South Korea are the only countries that have entered into such treaties with China. It is reported that many countries are currently in the process of negotiating with China for the finalisation of similar treaties.  

Notwithstanding the definition, the following uncertainties as to the applicable scope of “Foreign Employees” have not yet been addressed or clarified by the PRC authorities:

  • Given the use of the terms “branches” and “representative offices” in the definition of Foreign Employees, whether it applies to secondees assigned to subsidiary companies in China, e.g., wholly foreign owned enterprises or Sino-foreign joint venture enterprises.
  • The proposed provision that residents from Hong Kong Special Administrative Region (“HK”), Macau Special Administrative Region (”Macau”) and Taiwan who are working in mainland China shall also participate in the social insurance scheme originally  contained in the draft of the Interim Measures has been taken out from the final version. In such circumstances, whether and how residents from HK, Macau and Taiwan working in mainland China shall participate in PRC social insurance scheme? It is yet to be seen whether any specific regulations regarding residents from HK, Macau and Taiwan will be issued and how local social insurance authorities will implement the Interim Measures in this respect.

2. What Is The Cost?

Social insurance contributions shall be made for basic pension insurance, basic medical insurance, work injury insurance, unemployment insurance and maternity insurance.

The Interim Measures is silent on whether the social insurance contribution of the Foreign Employees shall be made at the same rates and based on the same calculation formula of Chinese local employees and whether such issues may need to be addressed by the detailed local implementation rules although many people believe that it should be the case.

As a general reference, in year 2011, the maximum monthly contributions in Beijing and Shanghai on the part of a Chinese local employee is around RMB1,300, and that on the part of an employer is around RMB4,400.

3. How To Pay

The PRC Employer/PRC Host Unit shall, on its own initiative, arrange for social insurance registration for the relevant Foreign Employee within 30 days upon issuance of his work permit.  

The PRC Employer/PRC Host Unit shall (a) make its own statutory contribution to the social insurance authority and (b) withhold the portion of the social insurance payable by the Foreign Employee from his or her salary on a monthly basis.

4. How To Utilize Social Insurance Benefits

There still remain various uncertainties as to how Foreign Employees may enjoy PRC social insurance benefits, e.g., according to the relevant PRC laws and regulations, a foreigner needs to surrender his work permit and leave China within a prescribed period of time after his employment relationship with the Chinese employer is terminated. In such case, how can he benefit from PRC unemployment insurance? Moreover, the designated hospitals under PRC basic medical insurance are mainly local hospitals with little or no English speaking capability. Would the medical insurance be extended to medical institutions with English-speaking staff in order to suit the needs of Foreign Employees? Furthermore, would Foreign Employees with more than one child enjoy the benefits under the maternity insurance originally designed in light of the one child policy in China? It is hoped that further detailed implementation measures at both national and local levels will be issued to address these issues.

Notwithstanding the above, the Interim Measures set down the following principles for enjoying certain types of social insurance benefits by Foreign Employees:

  • If a Foreign Employee leaves China before reaching his retirement age, he may:

a. retain his personal social insurance account, which may be re-activated for social insurance contribution purposes if he returns to and takes up an employment in China again; or

b. terminate his PRC social insurance account by serving a written application, and receive one-off payment of the balance of his personal social insurance account.

  • If a Foreign Employee passes away, the balance of his personal social insurance account can be inherited pursuant to the relevant laws.
  • If a Foreign Employee has become qualified to enjoy his PRC social insurance benefits on a monthly basis (e.g., pension)  but wishes to live abroad (e.g., in his home country), he shall provide a certificate confirming he is alive to the relevant PRC social insurance authority at least once every year. Such a certificate should be (i) issued by the PRC embassy or consulate, or (ii) notarized by the relevant authority of the country in which he resides and legalized by the relevant PRC embassy or consulate. The requirement of such a certificate can be exempted if the Foreign Employee is able to attend at the relevant PRC social insurance authority in person to prove that he is still alive.

5. How To Resolve Social Insurance Disputes

Should a social insurance dispute between a Foreign Employee and its PRC Employer/PRC Host Unit arise, either party may apply for mediation, arbitration or bring a lawsuit against the other party. These channels may not be cumulative depending on the nature and circumstances of the dispute. Hence, once a dispute arises in practice, it is advisable to seek legal advice before taking any legal action.

A Foreign Employee may also file a complaint to the relevant social insurance administrative authority or social insurance premiums collecting agency if his legal rights with regard to social insurance are infringed upon by his PRC Employer/PRC Host Unit.

6. What Are The Penalties For Non-Compliance?

According to the Interim Measures, a communication mechanism between the authority that issues work permits to Foreign Employees and the social security authority would be established to impose closer supervision and inspection over foreigner’s participation in PRC social insurance scheme. If a PRC Employer/PRC Host Unit fails to arrange for social insurance registration for its Foreign Employee or fails to make/withhold social contribution for its Foreign Employee, the relevant penalties as prescribed under the Social Insurance Law, the Implementation Rules and other related regulations shall apply.

Penalties for Failing to Arrange for Social Insurance Registration

If an employer fails to arrange for social insurance registration and refuses to rectify the situation within a prescribed time limit, a penalty ranging from one to three times of the payable social insurance contributions may be imposed. Moreover, a penalty ranging from RMB500 to RMB3,000 may be imposed on the in-charge personnel and other immediate accountable personnel of the employer.

Penalties for Failing to Make Social Insurance Contribution

If an employer fails to make full payment of social insurance contribution in time and refuses to rectify the situation within a prescribed time limit, the in-charge authority can adopt the following measures:

  1. check the employer’s deposit account with banks or other financial institutions;
  2. apply for approval from the relevant administrative authority to deduct the outstanding social insurance contributions directly from the employer’s account opened with banks or other financial institutions;
  3. require a guarantee from the employer in case its account balance is insufficient to pay the outstanding social security contributions; and
  4. apply to the People’s Court to detain, seize and auction the employer’s assets at a value equivalent to the outstanding social insurance contributions in case no guarantee is given under the situation as described in item (c) above.

In addition, a late fee of 0.05 percent per day shall be charged on the overdue amount, and if the employer still fails to make the payment in time, a penalty ranging from one to three times of the outstanding social security contributions may be imposed.

Penalties for Failing to Withhold Social Insurance Contribution

If an employer fails to withhold the payable social insurance contribution from the employee’s salary, the employer will be ordered to make up for the contribution on behalf of the employee within a prescribed time limit, and a late fee of 0.05 percent per day shall be charged on the overdue amount. Moreover, the employer shall not require the employee to bear such late fee.

Notwithstanding the above, if an employer’s business operation is in severe difficulty due to force majeure, a grace period (which shall normally not exceed one year) may be granted during which the employer’s contribution to social insurance may be suspended. After the lapse of the grace period, the employer shall make up the corresponding social insurance contribution, but no late fee will be charged. 

7Some Practical Tips

Common Pitfalls to Avoid

Given the more stringent requirements and the higher costs involved in case of violation, foreign investors with business operation in China need to be beware of their obligations under the latest PRC social insurance scheme and avoid falling into any of the following pitfalls:

  • failing to register its Foreign Employees for social insurance within the prescribed time limit;
  • contracting out the payment of social insurance premiums for its Foreign Employees;
  • failing to withhold the portion of the social insurance payable by a Foreign Employee from his salary;
  • delay or underpayment of social insurance contributions.

Review of Overseas Social Insurance Scheme

For cost control purposes, those overseas employers who assign foreign nationals to work in China under a secondment arrangement may wish to review and, to the extent permissible, adjust the social insurance scheme for the relevant secondees in their home countries to avoid or mitigate double contribution.

Watch Out for Future Development

In light of the cost implications, the potential penalties for non-compliance as well as the uncertainties pertaining to the requirements with respect to the participation in the PRC social insurance scheme by foreigners working in China, both foreign investors and expatriates are urged to pay close attention to the future development of PRC social insurance in order to better understand their respective rights and obligations and to make sure that they comply with the new requirements. It is expected that local implementation rules will be promulgated by different provinces/cities in China, which may clarify some of the uncertainties under the Social Insurance Law, the Implementation Rules and the Interim Measures. The actual implementation and requirement in one locality may differ from that of another locality. Therefore, in case of doubt, legal advice should be sought.

Iris Cheng of Deacons' Hong Kong office and Angel Feng of Deacons' Shanghai office specialise in advising on legal aspects of investment and business activities of foreign investors in the People's Republic of China.

Please email the author at iris.cheng@deacons.com.hk with questions about this article.