China is a booming economy with an $11.2 trillion GDP, 300 million consumers in the middle class, and an additional 200 million expected to join them by the not-so-distant year of 2026. On top of those impressive stats, the country is packed with educated residents that are ready to work as well as consume goods and services. It is and has been a hotbed for new business development and a primary target for international expansion. With the increase in opportunities for businesses in China, there’s a natural increase in competition among employers both from strategic sales and talent acquisition standpoints.
If you have an operation or are planning to start an operation, in the popular region, you’ll need to consider the implications surrounding China remittance. In this post, we’ll lay out how to move money to employees in China and transition money out of the country so you have a general understanding of the financial implications involved with doing business in this ever-growing marketplace.
When paying employees in China, your organization will need to consider the remittance requirements established by local labor laws, such as average minimum wage considerations and forms of payment. Whether you’re managing your Chinese payroll in-house or working with a global payroll provider, you’ll need to ensure that these requirements are being met each and every payroll cycle. Basic requirements for payroll regulations in China include:
• No deduction of wages for personal gain may be made from wages due to workers. The payment of wages may not be delayed without reason.
• An employer shall pay wages to workers during their statutory holidays, marriage, or funeral leave.
• Average minimum wage across the country is 1,600 yuan (US$239) per month, as of 2016.
Submitting payment to employees in China requires a legal establishment or infrastructure in the country. Companies must have a local bank account and proper documentation submitted with authorities to remit benefits and deductions required by local law. Whether your organization has an entity or works with an outside party to manage employees in the country, you’ll need a local presence to handle the China remittance requirements that must be handled during payroll. Typical remittance requirements in Chinese payroll include income tax and social security benefits such as pension insurance, medical insurance, unemployment insurance, and housing funds.
There are also separate requirements for income tax remittance for foreign employees working in China. This is determined by assessing the amount of time they’ve spent in China, the source of their income, and where their employer is based. For example, if a foreign national lives in China for less than 90 days in a tax year, they are only required to pay individual income tax on income for work done in China and for which the salary is paid by Chinese domestic institutions, entities or individuals. All of the income tax on income derived from working outside of China or paid by a foreign employer outside of China will be exempt. Plus, if China shares a double taxation agreement (DTA) with the foreign country in which the employee’s employer is based, the 90-day limit may be extended to 183 days.
As the employer, it’s your responsibility to remit the proper tax amounts from your employees’ payroll, both local and foreign team members. This is another area in which working directly with a global payroll provider can help your organization manage compliance.
There are also tax equalization considerations, primarily when working with expatriates in China. Tax equalization tries to compensate for foreign countries’ tax rates as a consideration in whether an employee accepts an assignment overseas. Without it, employees’ take-home pay could vary greatly depending on the country to which they are assigned. While working in China, an expat is typically responsible for calculating their “hypothetical” or “stay-at-home” tax, which is essentially equal to what they would have earned if they continued to live and work in the home location. The hypothetical tax will normally be withheld from the assignee’s normal pay and is retained by the employer as a “tax reserve.” The company would then pay all required home and host country taxes on company income (including taxes on expatriate benefits) during the assignment. This is another employer responsibility that should be considered during China remittance to ensure a stable assignment for your expats in China.
Outside of the requirements for actually paying employees in China, the requirements for transferring money out of China are becoming harder and harder. Much of the increase in restrictions for moving money out revolves around the pressures of the depreciation of the yuan and an overall decrease of foreign exchange reserves. These two factors have led the financial authorities in China to tighten the control on the outflow of foreign exchange.
While there are no specific regulations or new laws surrounding the outflow of money from China, authorities are starting to discourage capital outflow by demanding banks to strengthen the examination on documents and certificates, and to standardize the foreign exchange management.
These new efforts primarily affect Chinese financial institutions, not necessarily the businesses or individuals working in China. However, it’s important for businesses to be aware of these new efforts because there may be new hoops to jump through when trying to transfer money to a new location. Since earlier this year, banks and other financial institutions in China have had to report all domestic and overseas cash transactions of more than 50,000 yuan ($7,201), compared with 200,000 yuan previously. Banks now also need to report any overseas transfers by individuals of $10,000 or more.
One of the generally accepted methods for moving money out of China is setting up the transaction as a services deal from corporation to corporation, which may be necessary if you’re planning to move more than $50,000 out of China in a calendar year.
Contact Celergo to explore the ways we can help you to save on payroll costs, global treasury management headaches, or just need help maintaining compliance on the global scale, especially in a highly regulated country like China. Thank you for your attention!
**This article is for informational purposes only. It is not intended to constitute legal advice.