Do your Chinese entities need to contribute the PRC Social Security for your foreign employees working in China?

1. Legal basis

Back to May 1996, the Measures on the Employment of Foreigner in the PRC stipulates that work hours, weekends, holidays and annual leave, work safety and hygiene standards as well as social security for foreign employees working in China shall be implemented in accordance with relevant laws. However, the PRC law kept silence on the social security for foreigners working in the PRC till July 1, 2011, when the PRC Social Security Law came into effect. Before the launch of the PRC Social Security Law, the social security treatment on foreigners working in China were mainly subject to the then applicable local rules.

The PRC Social Security Law first clearly stipulates that foreigners employed in the PRC shall participate in the social security system in accordance with this law. To further enforce this Article 97 of the PRC Social Security Law, the Provisional Measures for Foreigners Working in China to Participate in the Social Security was published on September 6, 2011 and became effective on October 15, 2011 (the “Measures”). The Measures provides that all foreigners holding foreigner employment permits, foreign specialist certificate or other types of employment certificates shall be enrolled in the Chinese social security system and contribute to the basic pension insurance, basic medical insurance, unemployment insurance, work injury insurance and maternity insurance[1]. It shall be applicable not only to those foreigners directly hired by domestic employers, but also to those who are employed by overseas employers and seconded to work in China, such as the representatives of the representative offices. Both employers and employees must make contributions to the social security system with the same contribution rate of Chinese employees and based on the individual employee’s average monthly salary or three times of the monthly base salary announced by local governmental authorities annually, whichever is lower.  

2. Implementation of local policy

As we have commented above, before the PRC Social Security Law became effective, local policies provided guidance on the social security contribution of foreigners working in relevant local areas. For example, on October 19, 2009, Shanghai Municipal Human Resources and Social Security Bureau issued Circular of Shanghai Municipal Bureau of Human Resources and Social Security on Several Issues concerning the Participation of Foreigners Working in Shanghai, Personnel with Permanent (Long-term) Residence Abroad and Residents of Taiwan, Hong Kong and Macao in Social Insurances for Urban Employees (“Shanghai Policy”), which stipulates that foreigners who establish labor relationship with employers falling into the scope of entity participating in basic pension insurance in Shanghai can participate in basic pension insurance, basic medical insurance and work injury insurance (“Three-type Insurances”), which shall be agreed in the labor (employment) contract. Shanghai Policy treated the social security contribution as a benefit to the foreign employees not a compulsory liability of the employer and the foreign employee, and unemployment insurance and maternity insurance are not obligated to be contributed. On August 12, 2016, the validity period of the Shanghai Policy has been extended to August 15, 2021.  

Although the validity period of Shanghai Policy has been extended to August 15, 2021, the content related to contribution types are not in compliance with the PRC Security Law and the Measures, the upper level legislations. We are of the view that after July 1, 2011 (or the latest after October 15, 2011 when the Measures became effective), the rules set by the PRC Security Law and Measures shall prevail, which means legally speaking, in Shanghai it is compulsory to contribute all types of social securities for foreign employees working in China since 2011.

Our anonymous consultation with 12333 Shanghai, the hotline of Shanghai Municipal Bureau of Human Resources and Social Security shows that the local practice has been ambiguous in the past, the Three-type Insurance mode could be accepted by local authority provided the formality requirements are fully met, while the recent feedback in 2021 shows the in-charge authority intends to adopt the national standard instead of local practice. On August 16, 2021, the first day after the expiry of Shanghai Policy, we further confirm the local practice with 12333 Shanghai, the feedback confirms Shanghai Policy will not be extended and Shanghai shall adopt the national standard of social security contribution.   

3. Exemption of social insurances

On the other hand, in the past decade, China has entered into bilateral social security conventions with twelve (12) countries to avoid repetitive contribution of social insurance premiums in China and those countries, among which eleven (11) social security conventions entered into with Germany, South Korea, Denmark, Canada, Finland, Switzerland, Netherlands, Spain, Luxembourg, Japan and Serbia have come into force. For instance, the Convention between the People’s Republic of China and the Kingdom of Spain on Social Security came into force on March 20, 2018, which provides that Spanish employee working in China may submit a Certificate of Participation of Social Insurance (“Certificate”) issued by the General Administration of Social Security Fund in Spain to the competent social insurance institution in China, with the latter’s approval, the applicant and his/her Chinese employer can be exempted from the contribution of basic pension insurance and unemployment insurance in China for the period specified in the Certificate (“Insurance Exemption”), while basic medical insurance, work injury insurance and maternity insurance shall be contributed pursuant to the PRC law.

4. Social insurance benefit and the social insurance account

If Foreigners participating in social insurance satisfy the prescribed conditions, they are entitled to enjoy the social insurance benefits according to the PRC laws and regulations.

If the foreigner leaves China before reaching the age qualified for the social insurance benefits, his/her individual account shall be maintained and his/her period of contributions may be accumulated when he/she is employed in China again. However, upon written application for the termination of the social insurance relationship, the balance in the social insurance individual account could be paid to said foreigner in a lump sum. The PRC laws and regulation also stipulates that the balance in a foreigner’s social insurance individual account could be inherited.

5. Legal consequences for not contribution social insurance premiums

As stipulated in the PRC Social Security Law, failure to pay social insurance premiums on time and in full shall be ordered to make full payment of social insurance premiums within a prescribed period, and an overdue payment fine at the rate of 0.05% (“Overdue Fine”) shall be levied as of the date of indebtedness. If the payment is not made at the expiry of the prescribed period, a fine above the overdue amount but less than the triple amount shall be further demanded. After making up the social insurance premiums, the employer can request the employee to reimburse the part that shall be borne by the employee but the employer shall not request the employee to bear the Overdue Fine.

Given that local policies and practice may have conflict with provisions of national laws and regulations, legal consequences for not duly participation social security may vary in different cities. Taking Shanghai as an example, based on our anonymous consultation with 12333 Shanghai, legal consequences in Shanghai may be as follows:-

1. If Three-type Insurances have been contributed pursuant to Shanghai Policy, the possibility for the social insurance collection institution to order the employer to make up the premiums for the other two types of social insurance and/or pay Overdue Fine is rare. However, upon the expiry of Shanghai Policy, all types of social insurances shall be contributed accordingly.
2. If Three-type Insurances have been contributed, but the employer and the employee have not agreed on the types of social security contribution in the labor (employment) contract, the social insurance collection institution may order the employer to make up the premiums for the other two types of social insurance, i.e. unemployment insurance and maternity insurance, and/or pay Overdue Fine.
3. If no social insurance has been contributed, the social insurance collection institution can order the employer to make up the premiums for all types of social insurances and/or pay Overdue Fine.

After the expiry of Shanghai Policy, local authority may pay close attention to the social security contribution of foreign employees. We hereby highly recommend the entities hiring foreign employees to cautiously review your social security contribution policies of foreign employees and make sure the policies are fully compliance with the PRC Social Security Law.