How to structure a salary package in China

The structure of a salary package payable for each position in a China-based company should be given careful consideration. Certain employees need to be incentivised, while other roles require a more fixed form of salary.

Furthermore, the employer should consider the amount of income tax that will be payable by the employee based on the proposed salary package. This is particularly important if the company offers a net salary package to its employees.

Base salary and bonus

The employee’s base salary needs to be stated in the labour contract. This is the fixed monthly amount that the company guarantees to pay the employee. Companies should beware including any payments that are separate to the base salary in the labor contract, as they will be legally bound to make the payment.

The company can also pay bonuses at various points throughout the year. In this case, please note that under Chinese IIT law, employees can use a special tax treatment for a one-off annual bonus to reduce their tax burden.

Allowances

The Chinese Tax Bureau allows foreign staff (including those from Hong Kong, Macau and Taiwan) to deduct certain “allowances” before calculating the tax burden on their monthly salary, provided that:

• In the employment contract (and sometimes also in a board resolution depending on the location of the company), there should be a clear reference to the amount being paid to the employee under the title of each specific allowance;
• Each month, the employee should produce evidence to show the company that this money was indeed spent on the services described in the contract; this is done using the ubiquitous “fapiao”, or official invoice, which should be received whenever an official monetary transaction is completed in China.

Generally, the following allowances are deductible:

• Meal allowance: Most of the fapiaos submitted should be issued by restaurants, but for some portion of the allowance fapiaos issued by supermarkets may also be accepted.
• Housing allowance: The amount spent on rental of an apartment may also be deducted.
• Laundry allowance: An allowance for the dry cleaning of clothes.
• Children’s education allowance: The education must be received in China and, as with the other allowances above, a fapiao must be received.
• Home visit allowance: Each year a foreign employee is allowed to deduct the cost of one or two return flights back to their home country (usually the cost of a ticket up to business class may be permitted).

Mandatory benefits (social security)

The next portion of the salary package is mandatory benefits (social security), often referred to in China as social insurance and housing fund. Contributions are made by both the employee and employer. The employee’s portion is deducted from their gross salary. The proportions and maximum contributions made by employer and employee vary depending on where the business is located.

Defining net salary

Normally, “net” is defined as the amount that employees receive each month after payment of IIT and mandatory benefits. Misunderstandings between managers and employees over the definition of “net” salary are commonplace. If a company intends to offer such packages to employees, we suggest that the HR department draws up a clear example to explain to each employee how their salary package will be structured, and to show the employee how much money they will be able to take home each month.

The total of the base salary, allowances, bonuses, non-mandatory pension plans, and the employer’s portion of social insurance contribution are added together to form the total compensation and benefits (C&B) amount.

This article originally appeared in China Briefing

China Briefing

China Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates

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