Working and Living in China

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On this Page:

- China: Entry and Residence
- China: Work Permits
- China: Taxation of Individuals
- China: Health, Education and Pensions
- China: Buying and Renting Real Estate

China: Entry and Residence

Culture Shock

Although there are concentrations of foreigners in some major cities, notably of course Beijing and Shanghai, which has 300,000 expats, where you can expect to find a parallel 'Western' life-style and facilities, in most parts of China that is not the case. Few people will speak English, you will have no choice but to adopt Chinese eating and cooking habits, and you won't get very far without at least an elementary knowledge of Chinese. Of course, if you are employed at a facility operated by a Western company, even in a remote region, you may well find a nucleus of other foreigners and Westernized facilities which may dull the shock of a transition to China. Some people, however, may prefer to take on the change in a full frontal way!

'Face' is the key to understanding how to behave socially in China. In countless ways, it is necessary to be sensitive to the nuances of social and family position, in terms of conducting a conversation, your bodily behaviour, and in such matters as paying for things. Chinese people are not rich, with rare exceptions (more and more of these, of course), and Chinese salaries are still so low by Westerrn standards that it may seem impossible for people to live on them. But they manage, and by some miracle will turn themselves out impeccably for social occasions. Don't be fooled: unless you are sure of the financial position of the people you are with, you should assume that you are the richest person present, and therefore expected to pay the bill, although other members of the party may make a show of offering to pay. Females, by the way, never, ever pay in China, unless they are in a hen party.

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China: Work Permits

There is no separate work permit as such; the different types of visa cover various working situations. The Z Visa will normally allow an applicant a 30 days' stay during which the application can be made for a longer stay, usually under a D Visa. In most cases, the applicant (having fulfilled the quite onerous documentation requirements, including submission of the employer's business license) will have to leave China to wait for the longer-stay visa (temporary residence permit) to be issued. It will have to be renewed annually. Executives with companies having paid-up capital of more than USD3m may find it possible to stay in China while waiting for their longer term permits. The cost of the application process is likely to be in the region of RMB2,000.

The complication and expense of the application process for a temporary residence permit amply explains why people use the F visa route whenever they can.

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China: Individual Taxation

Permanent residents are subject to tax on their world-wide income. Non-residents and residents who have not yet become permanent (the first five years of residence) pay tax on their China-source income; but the residence qualifications are a bit hazy, especially for people of Chinese origin.

Income is defined very broadly, but excludes interest on bank deposits. There are personal allowances, which are higher for foreign individuals. Tax rates vary from 5% to a maximum of 45% on monthly earned income over RMB100,000. There is capital gains tax of 20%, and the same rate applies to many types of unearned income. Employers operate a 'PAYE' withholding tax system for tax on salaries and social security contributions, which bear more heavily on employers (20% of payroll) than on employees (7%).

Withholding tax of 10% applies to dividends, interest, royalties and capital gains.

In April, 2010, the Chinese Ministry of Finance said it was studying the possibility of a new payroll tax for social security to replenish presently under-funded pension accounts and even out other inequities of the present system.

Finance Minister Xie Xuren was quoted as saying that this was part of a general income tax reform to 'ensure better income distribution', but a survey by China National Radio showed that more than 70% of those who responded opposed the new tax.

Since then, commentators have been at pains to explain that the new tax would not increase the overall tax burden, but provide a broader basis for funding pensions and other social programmes.

Presently the state, enterprises and individuals each pay a "social security fee" into a social security fund to finance China's social security programs - including pension insurance, basic medical insurance and unemployment insurance. The funds are administered through provincial budgets, leading to problems as a result of uneven regional development and migration.

The proposed new social security tax would introduce standard country-wide compulsory contributions and be solely administered by the central government. This would ensure standardized benefits and solve the problem of funding migrants and the wealth gap between different regions.

It was also suggested that tax collection agencies could collect the money more efficiently than the present social security agencies, whose resources are over-stretched.

In September, 2010, the European Union Chamber of Commerce in China (EUCCC) said that many Foreign Invested Enterprises (FIEs) were experiencing problems obtaining clearance from local bureaus of the State Administration of Foreign Exchange or banks, for reimbursement of expatriate expenses in foreign currency to foreign affiliates, which initially paid the employee expenses.

According to the EUCCC, there is no state-level foreign exchange regulation clarifying that a Chinese company employing a foreigner may reimburse expenses, unless the Chinese company has been recognized as a Multi-National Corporation (MNC) and the conditions for being recognized as an MNC are very stringent.

In the present situation, due to Chinese foreign exchange control, the EUCCC says foreign companies may not be able to charge back employment costs for employees who are expatriated or seconded to work for their Chinese affiliate companies.

When the reimbursement can not be made, the EUCCC maintains this often generates a tax burden in the foreign company's home country where such expenses may not be deductible. Alternatively, when the reimbursement is effected, a tax burden may occur in China for the foreign company as a result of taxation of the re-invoiced expenses, even though it does not make any profit in this respect.

Tax authorities, say the EUCCC, frequently refuse to issue a tax clearance or exemption certificate, unless Enterprise Income Tax (EIT) and Business Tax (BT) are paid on the reimbursement of expenses. Moreover, an additional tax burden arises for the Chinese affiliate which cannot deduct social security expenses borne by the employer. The EUCCC says foreign employees are also penalized as all or part of their social security contributions should be included in their Individual Income Tax (IIT) base.

These restrictions put an undue burden on foreign groups and FIEs doing business in China as well as foreign individuals, amounting to discrimination against the employment of foreigners in China, as employment of Chinese nationals is not subject to the same constraints, says the EUCCC.

The EUCCC recommends:

• The issuance of state-level foreign exchange regulations allowing Chinese companies to reimburse employee expenses paid by foreign affiliates and related to foreign employees working for Chinese affiliated companies;
• The clarification that foreign companies are not liable to EIT and BT on employee expenses charged back without any margin or profit to their Chinese affiliates and corresponding to foreign employees working for the said Chinese affiliates;
• Permission for deduction from the EIT base of social security expenses borne by the employer for foreign employees, irrespective of their nature (i.e. including mandatory and voluntary contributions as well as commercial insurance premiums);
• Exemption of social security contributions from IIT for foreigners working in China, irrespective of their nature (i.e. including mandatory and voluntary contributions as well as commercial insurance premiums) and irrespective of whether such contributions are paid by the employer or the employee.

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China: Health, Education and Pensions

Health Care

China runs a 'polyclinic' system, and by and large it is open to foreigners. You just turn up at a clinic with your residence and health insurance documentation. As everywhere, there may be long lines waiting for treatment; appointments are not possible in public clinics. Although the system has not been privatized as such (there are parallel, completely private and much more expensive facilities), it has been 'marketized', and you pay for what you get. Of course the public facilities are far cheaper than Western equivalents, but the standard of care varies widely. As you would expect, there are better facilities in the major cities. Rural clinics may be very primitive.

Some hospitals have 'VIP' but still public wings in which faster and perhaps better treatment can be bought; at any rate the facilities are likely to be better. Chinese clinics may or may not accept Western insurance policies, and you may have to pay in advance (occasionally with credit cards) and reclaim the costs from your provider.

Of course, if someone has a good health insurance provider, the usual option will be to go to a private sector, perhaps even Western-run clinic where prices and standards may not differ all that much from those in the West.

Emergency services vary widely in availability and cost. The first thing to do, on arrival, is to research the local situation so as to be ready in case of need. Many Western companies have arrangements of their own, either through an in-house clinic, or through a contract with a local public or private clinic.

Education

There are international schools in many parts of China, and they often teach the International Baccalaureate.

Cities with international schools include:

Beijing, Cashan Dongguan, Chaoyang District, Chengdu, Guangzhou, Utahloy, Nanjing, Ningbo, Quingdao, Shanghai, Suzhou, Tianjin and Xian. The cost of attendance at such schools can however be as high as USD25,000 a year.

There are of course much cheaper options for parents who are prepared to send their children to Chinese schools, particularly at a young age, when they will find it easy to learn Chinese, something that can hardly be bad for them in later life. There are private Chinese nursery schools which teach both in English and Chinese (the Chinese want their children to speak English even more than Westerners want sinophone children); the cost might be in the USD200-300 range, per month.

Once a child has a reasonable command of Mandarin, there are a certain number of primary schools open to foreigners, at least in the major cities. The child will need a Chinese health certificate, vaccination certificate and passport, and the parent needs to go with the child to the school to register.

Pensions

The social security system in China is in a state of flux, with legislation to create a uniform national system in progress; this law, which will probably come into effect in 2011, will extend the social security system to resident foreigners. China has a certain number of reciprocal international social security agreements, for instance with Germany, but given the chaotic state of the existing system, it's not clear what they mean on the ground, and they don't normally include pension provision.

The mandatory retirement age in China is 60 for men and 50 for women, although as the population ages, these limits are likely to be extended. A trial program is underway in Shanghai.

The bottom line at present is that foreigners in China, even those living there long term, need not look to the Chinese system for any assistance with their pensions, and should make private arrangements if their employers do not provide a scheme for them.

For the Chinese themselves, pension contributions are made under a twin-pillar system, with the employer contributing about 20% of pay to a State pay-as-you-go scheme, and the employee contributing a mandatory 8% to a funded, quasi-private system.

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China: Buying and Renting Real Estate

Accommodation

It is likely that your employer will assist you to find an apartment, something that you will find extremely difficult if you are on your own, except perhaps in Beijing, Shanghai, and Guangzhou, where there are agencies serving the expat market. Of course, expat salaries are such that in most parts of China you can expect to be able to afford upper-level accommodation.

In Beijing many expats choose to live in one of a number of newly-built high-rise apartment blocks, some with pools and exercise facilities. There is no formal separation between the Chinese and foreign communities, but naturally they tend to cluster. The most popular district is Chaoyang, which has a metro and is home to many of the larger international firms.

Villas in gated communities in Shunyi, near the airport, are a popular choice for families with children, partly because there are two prominent international schools there, although the commute is a up to an hour at peak times.

As regards buying a property, the market has been very febrile in recent years, particularly in Shanghai, and the government has taken various steps to try to cool it down.

In December, 2009, the government reinstated a sales tax on homes sold within five years of purchase in order to control speculative activities in its urban real estate sector. In January 2009 when prices were falling and the economic crisis was at its bleakest point, the penalty period of the tax had been reduced from five years to two years. A government survey showed that home prices in 70 major Chinese cities had risen about 4% year on year in the previous month.

In the year as a whole, prices rose 10.7%, and in March, 2010, Premier Wen Jiabao said that the government would continue with cooling measures in order to prevent a real estate bubble.

"We will rein in speculative housing purchases by intensifying the implementation of differentiated credit and tax policies," Wen was quoted by China Daily as saying. "It is the government's responsibility to guide the property market. I am confident that the government will ensure the healthy development of the property market," he said.

In April, 2010, the Chinese Ministry of Housing and Urban-Rural Development (MOHURD) is reported to have approved a property tax trial in the four cities of Beijing, Shanghai, Shenzhen and Chongqing. Reports suggested that the tax rate would be 1.2% - 1.5% calculated on 70% of the purchase price of the property. MOHURD did not make an official comment, but a number of sources said that the measure still awaited the go-ahead from the Ministry of Finance and State Council.

Statistics published by the Chinese Ministry of Finance has published statistics on land transfer payments in 2009 which show that revenues, at RMB1.424 trillion (USD208.5bn), were up 43.2% in the year; this fee income is the mainstay of revenues for local government in China.

Land transfer fees and administrative charges make up almost half the cost of a house, making local government a major beneficiary of China's real estate market boom. About two thirds of the income originated in the booming coastal provinces. Land acquisition and compensation for demolition accounted for 40.4% of the total, while urban construction and land development was 27.1% and 10.7% respectively.

The fees fell by 19.7% in the first half of 2009, the low point of the economic crisis, only to rise by 110.9% in the second half, a sign that fiscal stimulus measures were feeding the property boom. House prices in Beijing almost doubled in 2009.

In response to increasing unrest at the overheating of the property market, a statement was issued after the conclusion of an executive meeting of the State Council chaired by premier Wen Jiabao, in which it was stated that the Chinese government had raised the down payment required from second-home buyers to a minimum 50% of the value, up from 40%. The statement added that first-home buyers' downpayments would have to be at least 30% of the property price if the property is above 90 square meters in size. It also indicated that tax policies would be adjusted to "influence purchases and adjust property investment returns."

In May, it transpired that the proposed new tax could apply to owner-occupied as well as commercial properties. It also appeared that local government revenue shortfalls are the driving force behind the intitiative and not the overheated property market. Legal obstacles and a lack of consensus on the structure of the tax have been the main stumbling block.

As a totally new tax it would need approval from the National People’s Congress, a lengthy process, but a real estate tax based on an existing tax imposed under a temporary regulation may only require State Council approval. Existing land taxes need not be affected by the introduction of such a real estate tax.

Finally, in October, the MOF issued a statement advising that a property tax on the residential sector was necessary for the sound working of the property market, an equitable distribution of income and for restructuring of the economy.

The Ministry of Finance also announced that the contract tax on the purchase of sole residences would be halved as of October 1, and homes with an area of less than ninety square metres would have this tax reduced to 1%. At the same time there would no longer be relief of personal income tax on the capital gains from sale of owner occupied properties, where sale has taken place within one year.

The IMF predicts that house prices in 2010 in China will grow by 10.5%.

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