Employers’ Overseas Social Insurance Contributions are IIT Taxable

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Jan. 6 – According to the old Circular guoshuifa [1998] No. 101, overseas social welfare contributions made by employers are exempted from IIT, as long as they are mandatory social insurances with legal basis and such costs are not deducted from the WFOE’s taxable income for corporate income tax (CIT) calculation purposes. Circular No. 101 was cancelled by SAT Public Notice No. 2 in 2011. As a result, an employer’s mandatory contributions made to the social welfare schemes in his home country, such as social security and medicare, should be treated as taxable income for IIT purposes. This requirement took effect from January 2011.

However, as very often happens in China, this tax rule change was not immediately implemented by most local level tax authorities. In fact, many tax officials at local tax bureaus (LTBs) are still unaware of this cancellation, and thus continue to allow expats to exempt their employer’s social contribution from their IIT taxable income. However, recently, albeit infrequently, we have encountered LTBs requiring the disclosure of the employer’s portion of social welfare contributions overseas.

From 2012, with the requirement to involve expats into China’s social welfare system, it is likely that there will be increasing emphasis on this issue. Therefore, it may be wise to review salary information and begin adding the employer’s contribution to overseas social welfare into the taxable salary income for calculation of China IIT if they would like to ensure that their operations are 100 percent risk-free in terms of tax compliance.

We summarize the current legal requirements concerning expats’ social welfare contribution below:

  • Employees’ contribution to overseas insurance/pension plans (whether commercial or mandatory) cannot be deducted from his/her taxable salary amount for PRC IIT calculation purposes;
  • Employers’ contribution to the employees’ overseas pension/insurance program (whether commercial or mandatory) is taxable in China and has to be included in the employee’s monthly taxable income;
  • For expats who participate in China’s social welfare scheme, the employer’s contribution does not need to be included in the taxable income, and employee’s contribution can be deducted from his/her taxable salary amount for IIT calculation purposes.

Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China. The firm specializes in assisting foreign enterprises with their tax obligations. For further advice and specifics relating to individual income tax in China, please email china@dezshira.com, visit www.dezshira.com, or download the firm’s brochure here.

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