Formal contracts between a foreign employer and a Chinese entity govern the temporary assignment of an employee to work in China. Multi-national corporations use secondment agreements to manage the transfer of technical experts and managers to their Chinese subsidiaries while keeping the individuals on the payroll of the home country. These agreements define the responsibilities of each company, the method for recharging the salary costs, and the duration of the assignment.
They are a requirement for determining the tax and social security obligations of the employee and for justifying the payment of funds from the Chinese entity to the foreign parent. The State Taxation Administration reviews these contracts to ensure that they are not being used to avoid the economic employer doctrine. The rules apply to all temporary cross-border transfers within a corporate group.
The boundary of the agreement is set by the specific start and end dates of the assignment.
Defining the scope of work and the reporting lines is the first step in creating a valid contract for a foreign expert. Secondment agreements specify that the employee remains legally employed by the foreign company but works under the daily direction of the Chinese host entity. The contract must state whether the salary will be paid by the foreign employer and then recharged to the Chinese company, or if the Chinese company will pay the employee directly.
This has significant implications for the individual income tax calculation and the corporate tax deduction. The agreement also covers other benefits, such as housing allowances, travel expenses, and health insurance. These details are necessary for the tax bureau to determine the total taxable income of the individual.
Clear terms help prevent disputes between the two companies and provide the employee with legal protection during their stay in China.
Coordinating the payment of taxes in both the home and host countries is a requirement for international compliance. Secondment agreements often include a tax equalization clause where the employer agrees to pay any additional tax incurred by the employee due to the assignment. The Chinese entity must act as a withholding agent for the portion of the salary that is attributable to the work performed in China.
This involves registering the employee with the local tax bureau and filing monthly tax returns. The tax bureau uses the agreement to verify the income reported by the individual and to check if the correct amount of tax has been paid on the recharged costs. If the assignment lasts for more than one hundred and eighty three days, the employee becomes a tax resident of China and is liable for tax on their global income.
This makes the accuracy of the assignment dates in the contract particularly important for tax planning.
Managing the contribution to local insurance schemes is the final stage of the regulatory process for foreign workers. Secondment agreements must clarify whether the employee is exempt from Chinese social security contributions under a bilateral totalization agreement. China has signed such agreements with several countries to prevent employees from paying into two different social security systems at the same time.
If an exemption applies, the employee must provide a certificate of coverage from their home country. If no agreement is in place, both the Chinese employer and the employee must contribute to the local pension, medical, and unemployment funds. The secondment agreement should state who will bear these costs and how they will be reported.
Failure to comply with the social security rules can lead to fines for the Chinese company and problems with the employee’s work permit. The final status of the employee is a result of the coordination between the tax, labor, and social security authorities.
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