Learn About the Salary Package in China
The base salary of employees must be in the labor contract, and this is the fixed monthly amount that the company guarantees to pay the employee. One-off payments can also be given. For instance, a lot of companies give a 13th month pay to their employees during the New Year.
In structuring a salary package, there needs to be careful consideration for each role. Some employees must be given incentives, but others need a fixed remuneration of their total income.
It is important to think about the income tax that each member must be required to pay according to their salary package.
Companies must be very careful when it comes to including payments. These are separate from their base salary in the contract. It might be better to give those payments as an annual bonus. In this case, employers will be able to clarify that the bonus is going to be paid in case the business performs well. However, it will not be given if the business does not perform well for that year.
The bonuses can also be paid at different times throughout the year. If this is the case, employers must be aware that based on the Chinese Individual Income Tax (IIT) legislation, a special tax treatment can benefit employees for an annual bonus, which reduces their taxes.
The Chinese Tax Bureau lets foreign staff deduct some “allowances” before they calculate the tax burden from their monthly salary if:
- There is a clear reference of the amount that is paid to the employee in their contract based on the title of specific allowances
- Every month, the employee must have evidence to prove to the company that the money was spent on the services written in the contract. It is done using the official invoice or “fapiao” which must be received once the monetary transaction has been completed.
Tax Deductible Allowances:
- Meals – Foreign employees may deduct a specific amount they spend on meals every month from their income that is taxable. Most fapiaos in this context are issued by the restaurants they dined at, but some can come from supermarkets. The fapiao must say that they purchased “meals” or “food”.
- Housing – The rental amount can also be part of the deduction, but must private landlords do not issue an invoice. They can only obtain a fapiao if they pay the Tax Bureau part of the rental money they collect. If you request a fapiao, the rent will be higher.
- Education of children – Foreign employees can deduct a part of their cost to study Chinese or the education of their children in China.
- Home visits – Every year, foreign employees may deduct one or two return flight costs, normally up to a business class, when they fly back to their country.
The amount covered by allowances in the salary of a foreign employee is not clearly stated by the law. The statute only says that the amount must be “reasonable”. However, a lot of companies allocate 30% of the total salary to allowances. There is always a possibility that the tax office might challenge it. Therefore, it is important to set the proportion of allowances at this level or below it.
- If the work is performed more than eight hours in a workday, the rate must be 1.5 times the normal salary
- When they are asked to work on the weekends, the rate is 2 times their salary
- If they must work on legal Chinese holidays, the rate is 3 times their salary
A good salary package is important if you want to set up a business in China.