1. Social security contributions for foreigners

As you may have been aware, China has issued a new Social Security Law that became effective on 1 July 2011 and subsequent to that, the Interim Measures for the Participation of Foreigners Employed in China in Social Security Insurance specifically required foreigners to start making social security contributions from 15 October 2011. However as social security is in practice managed by local governments, the implementation of this measure is varied by location.  A current status summary for major cities is as follows:

Shanghai has not yet issued an implementation rule and it has not started the practice of requiring foreigners to make contributions.  It is still unknown when Shanghai will announce its own implementation rule, so companies in Shanghai should pay attention to any new development.

 2. Employer's contribution to overseas statutory social security and pension

Based on Guoshuifa`1998` No.101 ("Circular 101"), home country employer's statutory contributions for a foreign employee working in China to overseas social security, pension or similar schemes, subject to approval of local Chinese tax bureaus, may be exempt from China individual income tax ("IIT") when both of the following conditions are met:

• The employer contributions are mandatory according to the respective home country law or regulations of the foreign employee, e.g. US social security and Medicare scheme.
• The relevant expenses are not claimed as expenses by a Chinese entity for China corporate income tax purposes.

State Administration of Taxation (SAT) issued a notice on 4 January 2011 announcing that Circular 101 has become invalid. However, the notice did not specify the tax treatment of the above-mentioned employer contributions subsequent to the abolishment of Circular 101. Nevertheless, we would like to draw your attention that such local practice may change without prior notice until such a time that a new rule is announced.  As such, companies are recommended to manage the situation with due care in the meantime.

3. Is a confirmation required for non-taxable benefits in-kind for foreign employees

In accordance with Guoshuifa`1997` No.54 (Circular 54) and Guoshuifa`2004` No. 80 (Circular 80), certain qualified and properly arranged benefits such as housing subsidy substantiated with valid documents for foreign employees are exempt from China IIT.  Supporting documents such as lease agreement and valid invoices for rental payment should be submitted to tax authorities for review and confirmation.  However, in the past, submission of supporting documents was not strictly required by many tax bureaus in practice.

It appears that this situation is changing recently and some tax bureaus start to require the review of supporting documents for non-taxable benefits for foreign employees.