Establishing your business in China

Why do business in China?

China has the second largest economy in the world, with a GDP of USD$ 9.2 trillion, which shows remarkable growth compared to its 1978 GDP of USD$ 214 billion. Currently, the market is transitioning from one that was one of low-cost and high labour to one that is focused on high-value-added production and technology.

The economy in China continues to grow and the consumer market is one of the fastest-growing in the world.  The Chinese government is also taking steps to reduce the risk in financial markets. This, along with innovation, digitalization and research is helping to create a thriving environment that has become hugely appealing to those considering doing business there.

Territory data

How to set up payroll in China

As China has one of the biggest economies in the world, it provides businesses with the opportunity to grow and take advantage of its potential. However, many businesses might be put off by the potential complex laws and regulations that govern how businesses operate, this can also include payroll.

Maintaining compliance

Businesses that operate in China will need to make sure that they adhere to all Chinese payroll and employment laws. Therefore, some things will need to be considered when it comes to labour relations.

Maintaining compliance will require businesses to consider Written Employment Agreements which are mandatory. Minimum Wage based on individual jobs, Working Hours which is around 44 hours as standard and Overtime Work which is capped at a maximum of three hours per day and 36 hours per month.

Public holidays are also a consideration with workers receiving eleven days per year as well as annual leave which ranges from 5 to 15 days per year. There are also other types of leave to consider such as sick, maternity and funeral leave. It’s vital that you also ensure that you manage taxes and severance pay too, all of which are crucial.

Social insurance

These are mandatory contributions that you have to make to government-run funds. These contributions can vary based on the city. There are five social security funds known as:

• Pension
• Unemployment
• Medical
• Occupational Injury
• Maternity

Income tax

There are seven tax brackets to consider and the rates range from 3% to 45% based on earnings. 

Total cost of employment

The total cost of employment to a company can vary based on the city. As a result, employers have to pay the following:

• Pension – 14-22%
• Unemployment – 0.2% to 2%
• Medical – 3% to 12%
• Occupational Injury – 0.4% to 3%
• Maternity – 0.5% to 1%
• Housing Fund – 5% to 25%

When employing someone, a written contract is required with the employee within one month of starting work. If you do not have this in place you will be required to pay a double salary each month your employee has gone without a contract.

Chinese employment law and HR considerations

When operating in China, you will be expected to adhere to all employment laws and HR considerations in order to avoid problems or potentially breach the law.

There are three main forms of an employment contract. These are known as open-term, fixed term and project-related contracts.

As far as statutory employment rights go, there are many things to consider. Staff are required to have a minimum of 5 days to 15 days of annual leave based on length of service. Employees with 20 years’ service are entitled to 15 days, all of which will be fully paid.

Female employees are entitled to 98 calendar days’ paid maternity leave. This can be extended by an additional 30 days depending on the local rules. Men are entitled to paternity leave in most major cities. The level of paternity entitlement can change depending on the location.

Employees are not entitled to sick days for common ailments. However, they can take statutory medical treatment leave if they are ill or are suffering from a non-work-related injury. This can vary from three months to 24 months based on their length of service.

In line with this, they are also titled to compassionate leave as well as 11 statutory public holidays each year. 

As far as mandatory employee benefits go, there is a standard working hour system in place. It means that employees cannot work more than 8 hours per day or 44 hours per week. Overtime is possible although this is governed to three hours per day or 36 hours per month and it is paid at a rate that can range from 150% to 300% of an employees’ salary.

Setting up a subsidiary entity in China

To operate in China, a foreign entity must establish a formal business presence there in order to engage with employees. 

This can be achieved through a subsidiary, with the most common being a Wholly Foreign-Owned Enterprise (WFOE), a Representative Office, a Joint Venture or a Sales Office.

Unlike a WFOE, a Representative Office will have no formal legal identity in China because it is nothing more than an extension of your existing business. A WFOE can engage with Chinese employees but a Representative Office cannot, which means it will need to hire employees through a reputable employment agency.

In terms of additional registrations, the parent enterprise will need to have all documentation and information confirmed. This will have to be shared along with the capital and the purposes of the entity. 

Country nuances

When establishing your business in China, you will need to consider certain nuances that you’re expected to follow. 

Directors and board members are particularly important although there is no specific requirement for directors to be Chinese. However, some are barred from being directors in China and this can include those who have limited civil capacity, someone who has been convicted of corruption or bribery as well as someone who has had their political rights removed. Along with this, they must not have acted as a director for a bankrupt or liquidated country.

A WFOE must have a board of directors that consists of a minimum of three people and a maximum of 13 while every company must have a Legal Representative. Along with this, there must be a minimum of 1 shareholder and no more than 50 contributing to the capital of the business.