Policy Interpretation of Social Insurance of Foreigners in Shanghai
The recent topic of whether foreign employees need to pay social insurance in Shanghai has become a topic of common concern for foreign employees and company HR. The reason is that the Notice on Participation in Social Insurance of Foreigners Employed in Shanghai (Shanghai Municipal Human Resources and Social Insurance Bureau  No.38), which will expire on August 15, 2021.
On this issue, the Shanghai Municipal Government has not given clear instructions or issued new policies. We take this opportunity to sort out the relevant policies on whether foreign employees should pay social insurance in China, to speculate on the trends and prepare for the later stage for HR's reference.
Relevant Policies on the Payment of Social Insurance
Due to the collection and payment of social insurance is implemented in various overall planning cities and regions, some overall planning regions have special provisions on the liability of social insurance participation when enterprises employ foreigners. At present, when Shanghai enterprises hire foreigners, they can still confirm whether to participate in the social insurance (endowment insurance, medical and industrial injury insurance) through the way agreed by both parties. Accordingly, under the current cognition, if enterprises do not participate in social insurance when hiring foreigners, they do not think they have violated the social insurance obligations. However, this policy (Shanghai Municipal Human Resources and Social Insurance Bureau  No.38) will expire on August 15, 2021.
Then for the future employment of foreigners and participation in social insurance, we believe that, firstly, Shanghai local policies were issued before the Social Insurance Law, legal effect is lower than the national law; Secondly, with the continuous improvement of the social insurance system, the integration of social insurance into the tax collection and management, and the individual income tax policy considers the convergence of foreign employees with national treatment, foreign employees should also enjoy equal rights and obligations. We speculate that the participation rate of foreign employees in Shanghai will probably be close to national regulations. That is, foreigners employed in China shall participate in social insurance in accordance with the Social Insurance Law.
Tax Impact on Different Social Insurance Payment Schemes
For the changes in the employment cost and welfare security of foreign employees, the company also needs to make some plans as soon as possible! Of course, this is just a assumption. There are still many uncertainties, which can only be implemented until the relevant local departments make further explicit provisions on it, mainly involving the following aspects. At the same time, we will list the corresponding tax impacts of different social insurance payment schemes:
It is not ruled out that in August 2021, Shanghai will issue another notice to extend some policies, especially the state recently authorized the Shanghai Municipal Government to formulate laws and regulations in the Pudong New Area according to the needs of Pudong's reform and innovation practice, will bring a certain space for policy formulation.
Tax Impacts: Based on our observations, most foreigners working in Shanghai now choose not to participate in the domestic basic social insurance, If the Shanghai Municipal Human Resources and Social Insurance Bureau shall issue a continuing notice based on the Notice on Participation in Social Insurance of Foreigners Employed in Shanghai ( No.38) issued in 2009, then foreigners will have the opportunity to continue choosing not to participate in the insurance, Therefore, compared with before, there will be no change in individual income tax, and the labor cost of the enterprise will not increase additionally.
Tax Suggestions: It is suggested that the HR department pay close attention to the release of relevant policies in the near future, and timely understand whether the social insurance policies of foreigners will be updated.
According to the spirit of the executive meeting of the State Council on January 20, 2021, it is required to “do a good job in the normal collection and payment of statutory taxes, not collect historical arrears, and not increase the burden of small, medium and micro enterprises". The centralized settlement of social insurance for foreigners also does not meet the requirements of the relevant spirit. The possibility of retroactive payment should be small.
Tax Impacts: Based on the above situation, if the relevant policies are not extended after August 15, 2021, then foreigners in Shanghai need to pay social insurance as Chinese employees in accordance with national requirements, but it may not be necessary to make up the payment for the previous uninsured years, so there will be no individual income tax difference due to unpaid social insurance over the years.
Tax Suggestions: It is suggested that the HR department pay close attention to the release of relevant policies in the near future, and timely understand whether the social insurance policies of foreigners will be changed and updated.
The administrative operation of the Shanghai Municipal Government has always been known for its fairness and transparency. Even if there are further policy changes, a reasonable time will be reserved for enterprises to adjust.
Tax Impacts: Based on the above situation, if the relevant policies are not extended after August 15, 2021, foreigners are required to participate in the basic social insurance in accordance with the relevant national regulations. Therefore, the increase of the enterprise's social insurance expenses will lead to the increase of the enterprise's labor cost. With the increase of costs, the enterprise income tax may be reduced due to the decrease of profit, but it will also reduce the after-tax profit of enterprises. On the other hand, after foreigners participate in the insurance, the individual payment of social insurance will be deducted from the pre-tax salary, and the individual income tax will be reduced accordingly, but at the same time, the net income after tax will also be reduced accordingly.
Tax Suggestions: Since this change will directly affect the net income of foreigners, it is suggested that the HR department communicate and explain with foreigners in advance, and actively deal with various unexpected situations under the change of social insurance.
Enterprises can evaluate the cost budget in order to balance the risk of policy uncertainty.
Tax Impacts: As mentioned above, the labor costs of enterprises will increase after foreigners participate in the insurance.
Tax Suggestions: It is suggested that the HR department formulate a plan in advance, communicate and reach a consensus with foreigners to ensure that both the enterprise and foreigner recognize or know the impact of enterprise income tax and individual income tax after insurance.
Arrange to collect foreign employees' social insurance payment certificates overseas, and prepare for exemption from insurance according to the bilateral agreement.
Up to now, China has signed bilateral social insurance agreements with Germany, South Korea, Denmark, Finland, Canada, Switzerland, the Netherlands, Spain, Luxembourg, Japan, Serbia and other countries. For example, after providing foreign insurance certificates, German citizens can not participate in endowment insurance and unemployment insurance in Shanghai, Korean citizens can not participate in endowment insurance.
Tax Impacts: As mentioned above, any foreigner who has participated in the social insurance of the original country and meets the provisions of the bilateral social insurance agreement can be exempted from paying social security in China after providing relevant overseas insurance certificates. Therefore, there will be no impact of enterprise income tax and individual income tax for enterprises and foreigners.
Tax Suggestions: It is suggested that the HR department check the list of foreign employees of the company as soon as possible, and verify whether the nationality of the foreigners belongs to a party to the bilateral social insurance agreement, verify whether they are insured in their original country, and determine whether they need to be insured in China in the next step.
Source: Shanghai Human Resources and Social Insurance Bureau, the 17th Meeting of the Standing Committee of the National People's Congress, the Ministry of Human Resources and Social Insurance.
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