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New PRC Social Insurance Law: Working in China Becomes More Costly to Foreign Employees and Employers

In the past few years China has taken steps in its legislation that have made it more expensive for foreign employers and employees to do business there. The passing of the new PRC Social Insurance Law, which took effect on July 1, 2011 is just one of those steps. The new PRC Social Insurance Law requires expatriates working in China to pay a heavy tax burden to ensure that all employees in the PRC are insured with health and welfare benefits. However, since most international assignments do not last longer than an average of three years, these foreign employees may never reap the benefits of this insurance.

On September 6, 2011, China's Ministry of Human Resources and Social Security issued the interim rules for participating in the new PRC Social Insurance Law, which confirmed that the law applies to foreign employees working in China. The interim rules became effective on October 15, 2011 and require that all employees, whether domestic or foreign, who are employed by an entity in China must pay the new social insurance contributions which include basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance and maternity insurance.

While different provinces and local governments are still working on their own rules to clarify the application of some aspects of the insurance, what is clear is that most expatriates assigned to work in China will never benefit from their contributions into the social insurance plan. Most expatriates take jobs in China on a temporary basis for generally one to three years. They will never benefit from the employee contributions to a pension or unemployment insurance. Further, even during assignment, foreign employees generally do not use PRC hospitals covered by the statutory insurance because of language barriers and standards of care and clinics set up for expatriates are not covered under the statutory insurance. Foreign employees are also not covered by the "one child" policy and whether foreign females can get maternity insurance, whether they are having their first child or not, remains unclear.

Although most countries require expatriates to contribute to their social security systems while on assignment, the US has treaties with many countries which allows US expats to get credit for the tax so long as they are paying into their home country's social security system. It is highly unlikely given the current political relationship with China that there will be a US-China totalization treaty in the near future. In the meantime, it will cost more for both US companies and the expats they or their Chinese affiliates and subsidiaries hire to live and work in the PRC.

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