China (Mainland) at a Glance

The Employment Contract Law is the most important law in China relating to an employer and employee relationship. This law is applicable to the employment of foreigners as well as local Chinese employees, and it applies to local Chinese companies as well as Wholly Foreign-Owned Enterprise (WFOE). This law has been constructed to protect the rights of the workforce hired in China and builds harmonious employment relationships.

Written contract is mandatory. Employers operating in China without written employment contracts will be exposed to several risks. Specifically, if an employer allows more than a month to pass without a written employment contract, the employer will be required to pay double the employee’s monthly wage.

If an employer goes more than a year without executing a written employment contract, the employee without the contract will be deemed to have entered into an open-term / permanent employment contract with the employer. This usually means the employer must retain the employee until his or her retirement age. In addition, the Chinese labor authority may also impose fines on the employer for having violated the rules on written contracts. In this case, since there is no “employment at will” concept, the employer will not be able to terminate the employment contract without triggering severance pay.

The mandatory written contract also applies to renewal periods. In practice, most employers often sign a fixed-term employment contract with employees. Some of these employers may not execute a new contract when the previous employment contract expires, but instead assume it will be renewed automatically by the employee’s continuous service. In this situation, a contract that is not renewed may also trigger compensation obligations on the employer.

Employment contract is required by law. Certain terms need to be defined.

• Fixed-term or open-ended.
• Different lengths of probation.
• Need to state name, position, term, benefits, social security, etc.
• The contract must be in Chinese, common to have English translation. Courts will only rely on Chinese version in case of dispute.

Work Rules

Most China employees can work under the Standard Working Hours System. Under this system, a full-time employee’s working hours are generally limited to 8 hours/day and 40 hours/week (usually from Mondays through Fridays). Some company applies Flexible Working Hours System, which means start working time may varies from 8:30 to 10:30 in the morning, and end working time varies from 5:30-7:30 in the afternoon.

There are two exceptions to this system:

Comprehensive working hours of non-standard working hours

Irregular working hours

An employee can only be designated under either of the alternate systems if all conditions under the local laws are met.

China’s Irregular working hours is roughly similar to the salaried employee system in the U.S., but employees under this system are not necessarily exempted from all overtime pay.

Under the Comprehensive working hours of non-standard working hours, an employer may generally require an employee to work longer hours without overtime pay if the average working hours in a certain “comprehensive calculation” period (e.g., a quarter) do not exceed the applicable legal maximum on total working hours for that period.

It’s not required to keep a handbook but recommended to keep in the event of legal dispute. Burden of proof will be on the employer side. Both need to register work rules with the government with approval before application.

60 for male worker. 55 for female white collar worker and 50 for female blue collar worker.

For employment terms of more than three months but less than one year – probation of no more than one month.

For employment terms of one year or more but less than three years – probation period cannot exceed two months.

For employment terms of three years or more or for an open-term employment arrangement, the probation period cannot be longer than six months.

Each employee can have only one probation period with the same employer.

Overtime

Additional overtime pay is required:

• overtime on weekday: 150% of the hourly rate
• overtime on weekend or days off: 200% of the hourly rate
• overtime on public holiday: 300% of the hourly rate

The number of overtime hours is also regulated by law and is limited to no more than 3 hours per regular work day and no more than 36 hours per month.

If the employer wants to have different or longer working hours, the employer has to apply for a specific working time system and has it approved by the local government labor office.

Technically, every employee of a company from the top management down to the lowest hourly-paid employee would be eligible for overtime pay in accordance with the PRC Labor Law.

The perceived complexity in the PRC Labor Law is a created complexity through the application of some controversial methods to try and soften the terms of the law as written. Otherwise, every employee of a company from the top management down to the lowest hourly-paid employee would be eligible for overtime pay in accordance with the PRC Labor Law. There is some foundation for these workarounds on overtime pay because the law was created with the average production line employees in mind. So, there is some give and take on how the law is modified through common practices that are generally acceptable to the Chinese government and local labor councils, as long as they give their stamp of approval on the deal. However, all of these workarounds involve some degree of assumed risk because employees who feel they are being treated in a non-compliant way can file a complaint against their employer. If the Chinese government and/or local labor council are not complicit in how that employee is being treated, then the employer stands to lose the fight in the pro-employee environment that is Chinese labor law. Generally, it’s best to establish rules and have employee acceptance of the plans and rules.

Since it is more difficult to terminate an employee after the probation period, it’s usually (but not always) recommended to set an initial term of three years for a new employee. This allows the employer to set a six-month probation period (the longest permitted under Chinese law).

Specified in the contract. Normally minimum 30 days.

When establishing a legal entity, the minimum paid-up share capital required should be sufficient to cover at least 3 to 6 months of the company’s operating costs. This ensures that the company has enough liquidity to function smoothly in the early stages of its operations. Additionally, there may be certain debt/equity rules to adhere to, which can vary by jurisdiction.

For most business entities, the minimum number of directors required is one. This individual can either be a foreign or local resident. The company may also have a minimum of one shareholder.

In terms of the company’s administration, it is not necessary for the Legal Representative (Administrator) to be a local resident. The Legal Representative can be either a foreign or local individual. This flexibility can simplify the setup process for foreign businesses.

Upon incorporation, businesses are required to provide certain insurance coverage for their employees. This includes:

• Social Security: A mandatory social security program covering healthcare, pensions, and other welfare benefits.
• Housing Provident Fund: A savings program for housing and other welfare-related expenses, which is mandatory unless the company employs only expatriates.
• Disabled Security Fund: If the company employs disabled individuals, a fund based on the number of handicapped employees must be set up.

While some jurisdictions may allow virtual office setups, most businesses are required to have a physical office to make the entity operational. This ensures compliance with local regulations and provides a legal address for the business. However, in some cases, a virtual office may be acceptable depending on the nature of the entity and the market.

Opening a local bank account is another important step for any new entity. This process can take around 1 month, but it may extend up to 6 months in certain cases, depending on the bank’s internal processing time and the specific requirements for foreign businesses.

Companies are required to file both quarterly and annual electronic CIT returns.

• Standard CIT Rate: 25% for general enterprises.
• Small-Profit Enterprises: A reduced rate of 5% may apply for small-profit enterprises.

Companies must also account for and file VAT returns as part of their tax obligations.

Companies are obligated to comply with other tax requirements, including Individual Income Tax (IIT), Stamp Duty (印花税), and other local province surtaxes (附加税).

Accounting records

Maintaining accounting records is mandatory for all companies. Companies must maintain books of accounts and relevant financial documents to ensure compliance with Chinese accounting standards and tax regulations, ranging from 10 years to permanent.

Profit repatriation

Once the entity is operational and begins generating profits, it is important to understand how earnings can be repatriated to the parent company. Typically, profits can be repatriated following an annual audit or a special audit for dividend distribution, as long as the company is profitable and the retained earnings are positive. However, companies will need to pay withholding taxes in the local jurisdiction before repatriating profits.

Transfer Pricing Methodology

For companies engaging in related-party transactions, the following transfer pricing rules apply:

• Companies with significant related-party transactions must prepare local files if any of the following thresholds are met:
  • Tangible asset transfers exceed RMB 200 million.
  • Financial asset transfers exceed RMB 100 million.
  • Intangible asset transfers exceed RMB 100 million.
  • The total amount of other related-party transactions exceeds RMB 40 million.

Electronic Invoices (e-Invoice)

The use of electronic invoices, known as “fapiao” (电子发票), is mandatory in China. Companies must comply with this digital invoicing system for tax reporting and other official purposes.

Tax Representative Requirement

Foreign companies doing business in China are required to appoint a tax representative. This person or entity is responsible for ensuring compliance with China’s tax regulations and filings.

Fiscal Year and Filing Deadlines

The fiscal year in China follows the calendar year, running from January 1 to December 31. The deadline to file annual tax returns is typically May 31st of the following year.

If a director has an employment capacity at the same time, he/she will normally be taxed as a local employee.

Travel allowance, cell phone allowance, etc. is taxable in the hands of the employee.

Reimbursement with legal fapiao (invoice) are not taxable, e.g. for business travel.

Individual Income Tax (个人所得税) or IIT. This tax is deducted from employees’ salaries and must be submitted by the employer. The tax rates vary depending on the employee’s income level, and the employer is responsible for calculating and remitting this tax to the relevant authorities.

In China, the payroll tax submission deadline is the 15th of the following month after the payment of wages. However, this deadline may be extended if the 15th falls on a public holiday, based on local regulations or announcements. Employers must ensure timely submission to avoid penalties for late payments.

Individual Income Tax (IIT) is levied on a progressive rate of annual total, ranging from 3% for monthly taxable incomes of RMB 5,000 to 45% for monthly taxable incomes of RMB 85,000. The IIT is withheld from the employees’ monthly salary by their employers and is paid directly to the Chinese government by employers. This withheld IIT is then paid to the tax authorities on a monthly basis.

Employer should withhold the IIT and make the IIT filing each month. The IIT payable will be deducted directly from the employer’s bank account through the e-tax system.

The Annual Settlement of Individual Income Tax should be completed during March 31st to June 30th of the following year. The annual settlement is applicable to those employees who have multiple source of income / revenue or whom did not fully use of personal deduction due to career break in the tax year, calendar year).

Until December 31st 2027, when an individual resident obtains a one-time annual bonus/13th month salary, he/she will enjoy the preferential apportionment tax rate to calculate the income tax.

There is no local/resident tax in China.

Social Security Contributions (Employer’s Responsibility): The employer is required to contribute to the social security system.

China’s social security system includes several key insurance programs that employers must contribute to, which are essential for the welfare of employees. The six mandatory social security contributions are:

1. Pension (养老保险): This is a retirement fund designed to provide income for employees after they retire.
2. Medical Insurance (医疗保险): This provides coverage for medical expenses.
3. Unemployment Insurance (失业保险): This supports employees in case of job loss.
4. Work Injury Insurance (工伤保险): Provides compensation for employees who suffer work-related injuries.
5. Maternity Insurance (生育保险): A form of insurance that supports female employees during pregnancy and childbirth.
6. Housing Fund (公积金): The Housing Fund, which is mandatory for Chinese employees, is a contribution to help workers save for housing-related expenses. However, foreigners are exempt from this requirement.

Employers are responsible for contributing to these social security programs, with the exception of the Housing Fund, which is only applicable to Chinese nationals.

China employers are typically required to contribute to social insurance (which usually includes pension, medical, work-related injury, maternity and unemployment insurance) and the housing fund for all employees (but there are exceptions!). The exact type of required social insurance is determined by local rules. Expatriates and Hong Kong, Macau and Taiwan ID Card holders must be enrolled in statutory social insurance as well. If you are required by law to make the payments, you cannot contract out of your obligations by agreement with an employee. Any such agreement will be disregarded by the authorities.

Mandatory Benefits contributions are made by both employer and employee and applicable to both expat and Chinese employees. Mandatory Benefits contributions consists of 5 mandatory insurance schemes (pension fund, medical insurance, industrial injury insurance, unemployment insurance and maternity insurance) + a housing fund (only applicable to Chinese employees).

The Housing Fund was established in 1999 to help Chinese employees save money with the goal of purchasing their own homes. The Housing Fund is legislated at the national level with Regulations on Management of Housing Provident Fund and regulated by the Ministry of Housing & Urban-Rural Development. Money withheld for the Housing Fund is not distributed nationally. Rather, it is placed directly into the employee’s personal Housing Fund. That being said, this fund is only accessible for down payment, purchase, construction, or renovation of a house, or to pay back a mortgage for a house. Recent reforms have slightly relaxed these regulations, allowing employees to access the fund for emergencies such as urgent medical treatment.

As the Housing Fund is regulated by a different department than that of the Chinese taxes and social insurance, employers must register their employees with this separate agency. Newly-incorporated companies must register at the Housing Fund Bureau within 30 days of establishment. Within 20 days of registration, the company must then work with a bank to automate their Housing Fund contribution payments. Additionally, the employer must register a new staff member with 30 days of their first day working for the company.

Foreigners are completely exempt from Housing Fund withholdings, as the program is reserved exclusively for Chinese citizens.

The table below explains the contributions in Shanghai city from the period of July 1, 2025 until June 30, 2026. Rates vary from city to city:

*The above table serves as a broad guideline. Actual rates charged will differ.

A 13th month of salary is customary in many parts of China, and it is typically paid out before the Chinese New Year. This is not required, so the conditions for earning this bonus month of salary need to be specified clearly and in writing. For MNCs, discretionary annual bonus is more common. Some MNCs may have both the 13th month pay and the discretionary annual bonus. If the 13th month pay is stated in the employment contract, the employer is obliged to pay.

Many foreign companies doing business in China have generously added this 13th month, only after calculating their expenditures based on a 12-month system. If the employer is going to implement a bonus system for employees, the employer should clearly define its parameters in the employment contracts. For example, instead of paying a higher salary but no annual bonus, the employer may opt for a lower salary with an annual bonus, which is usually paid early in the following year. This will add no cost to the employee, but the employee can benefit from deferring their individual income tax payments.

Employers need to pay severance (Severance payment = One month’s salary for each year of service; for more than six months service but less than one year, it shall be calculated as one year; for less than six months service, shall pay half a month’s salary) unless the employee failed to satisfy the Conditions of the recruitment under the probation or seriously violated Company Regulations or committed a Civil Crime, and the employer has clear evidence to prove so. Otherwise, the employer needs to give a 30-day advance written notice to the employee and part ways with mutual consent. The employer may pay one month salary over and above the severance pay in case the employer does not want to serve a 30-day advance notice period.

Gross Salary: This is the agreed-upon wage or salary paid to the employee.

The law says pay at least once a month – normally paid within five days of the end of the payroll cycle.

Normally paid by bank transfer to the employee.

Can be up to five days in arrears.

Employees log in to the payslip web/app with registered cell phone numbers to view their e-payslips.

Discretionary on the company.

Statutory minimum standard: One year or more and less than 10 years’ cumulative service: five days of vacation; 10 years or more and less than 20 years’ cumulative service: 10 days of vacation; 20 years’ cumulative service or more: 15 days of vacation. Common practice is to give more annual leave to key staff to incentivize them.

Allowances for paid leave and sick leave, etc. are based on total working life, not just working period with the company.

Carry over is discretionary, but allowing your employees to carry over their vacation days to the next year (though not prohibited by law) will complicate things and is therefore not a common practice.

Employers are obligated to ensure their employees take their vacation days. Even to the extent that if an employer fails to do so, they are required to compensate the employee for untaken paid leave. In addition to regular salary, the employer is required to pay the employee 200% of the employee’s daily wage for each day of untaken paid leave, where daily wage = monthly salary : 21.75. This is not required for days of paid leave beyond the specified law. For instance, if the company offers more paid leave than what’s specified by law, the company may not be required to compensate for these days of untaken leave. In the event that the employer is unable to give the employee their entitled leave, they must compensate the employee with 300% of the normal compensation.

Sick leave can be availed in case of illness or non-work related injury. The employee shall provide the supporting document issued by a certified practitioner or a recognized medical organization and shall be approved by the employer. The number of annual (paid) sick leave permitted shall be pre-decided and stated in the employment contract of the employee, no carry over suggested. In case of a severe illness, employees in the first year of employment are entitled to a sick leave of maximum three months; one month of sick leave shall be increased for every full year after, but not more than 24 months total.

Need to use this leave separately from annual leave.

Maternity leave can be used for prenatal examination, childbirth, breastfeeding period, late pregnancy and delivery.

• Prenatal examination includes doctor visits during the first 12 weeks. Prenatal examination time is counted as working time.
• Natural delivery: Most provinces in China have extended the maternity leave from 128 days to 158 days. However, this may vary by city. The following are the provinces that do not follow the 158-day norm:
  • 178 days: Chongqing, Guangdong,
  • 128 days: Tianjin,
  • 190 days: Henan, Hainan (at most),
  • 188 days: Jiangxi, Hebei (for the third child), Zhejiang (for the third child)
  • 180 days: Gansu, Heilongjiang, Fujian (at most)
  • 148 days: Guangxi
  • 128 days: Jiangsu (no less than)
• Difficult delivery – leave days of natural delivery + 15 days
• Multiple deliveries – leave days of natural delivery + 15 days + 15 days extra per baby
• Abortion or Miscarriage within first 4 months – 15 days
• Abortion or Miscarriage after first 4 months – 42 days
• Prenatal leave: After 7th month of pregnancy can avail 1-hour day break. May also avail 2.5 months prenatal leave upon employer approval.
• Breastfeeding leave: For a child less than a year old, female employees may have up to two feeding periods per day (30 minutes per baby). Travel time for the same period shall be counted as working time. Alternatively, after childbirth, female employees may also apply for leave of 6.5 months upon employer approval. With maternity insurance (a part of social secuirty insurace), the employee is compensated with an allowance rather than her normal salary during maternity leave.

Male employees requesting paternity leave are, in the plurality of regions, entitled to 15 days. However, this may vary by location. The following are the cities that do not follow the 15-day norm:

• 7 days (of paternity leave): Tianjin, Shandong (pending to be extended to no less than 15 days)
• 10 days: Shanghai
• 20 days: Liaoning, Chongqing, Sichuan, Hunan
• 25 days: Ningxia, Guangxi, Inner Mongolia
• 30 days: He’nan, Jiangxi, Anhui, Yunnan, Gansu

There are nuances to paternity leave requirements that can vary by location. For instance, the city of Shenzhen requires a minimum 15 days of paternity leave if the mother is at least 23 years of age. Otherwise, the employee’s entitlement to paternity leave is somewhat ambiguous.

Employees with Maternity Insurance:

• If the employee has purchased maternity insurance from the Social Security Bureau (SSB), employers may not need to pay the employee’s full compensation during maternity leave. The SSB may pay all or most of the employee’s allowance. They will determine the allowance based on their own rules, but it will be based on the average monthly salary of all the employees of the company over the previous 12 months as well as the local average wage.
• The employer may still be required to contribute to the employee’s salary, depending on the rules of the local social welfare administration. In Beijing and Shanghai, all maternity leave compensation that exceeds the local average monthly salary must be paid by the employer. In Shanghai and Beijing, the maximum allowance standard is three times the average local salary.

Employees without Maternity Insurance:

• If the employee going on maternity leave does not participate in maternity insurance, the employer must pay the employee’s compensation during maternity leave to be calculated based on her average monthly salary of the previous 12 months.

From 2020 on, many cities merged Maternity insurance with Medical insurance.

Marriage leave – entitled to three days in general, it may be various from local government up to 30 days. Moreover, all legally married couples in Shanghai will be entitled to an additional seven-day marriage leave apart from the three-day national marriage holiday.

Funeral leave – entitled to one to three days in the event that an immediate relative of the employee (parents, spouse, parents in law, children) passes away.

Family visit leave – can be availed if the immediate family (spouse/parents) do not live together with the employee. In such case, leave days for spouse visit can be up to 30 days per year, and leave days for parents visit can be up to 20 days per year (single employees) and up to 20 days per 4 years (married employees). It is stipulated for employees working in specific legal entities (Government office, State-owned company, Public Institution) to enjoy this benefit.

Public Holidays in China are complicated and are one of the least predictable among developed nations. If the holiday lands on a weekend, the days will be observed on the next working days after the weekend. The Chinese New Year and National Day holidays are three days long. The week-long holidays on May (Labor) Day and National Day began in 2000, as a measure to increase and encourage holiday spending. The resulting seven-day or eight-day holidays (if Mid-Autumn Festival is near National Day) are called the “Golden Weeks” (黄金周) and have become peak seasons for travel and tourism. In 2008, the Labor Day holiday was shortened to three days to reduce travel rushes to only twice a year. Instead, three traditional Chinese holidays were added. Generally, if there is a three-day or four-day holiday (if Mid-Autumn Festival is near National Day), the government will declare it to be a seven-day or eight-day holiday. However, citizens will be required to work on a weekend. Businesses and schools would then treat the affected Saturdays and Sundays as the weekdays that the weekend has been swapped with. Schedules are released late in the year before and might change during the year.

The employer must pay the employee the full wage during a public holiday. The wage can be calculated as the average daily wage based on the employee’s history. An alternative holiday arrangement can be made but must occur no more than 60 days before the statutory holiday.

Statutory benefit contributions are paid by the Employer in the following manner:

1. Company set up,
2. Social contribution account and Housing Fund accounts opening,
3. File the employee information into company account when a staff has been hired,
4. Each month the company will generate the monthly billing for social security and housing fund, and
5. Make the payment from employer’s bank account to the social contribution and housing fund account respectively.

Contributions for the 5 social insurances (Pension, Medical, Unemployment, Maternity, Injury) are all together in one bill whilst housing fund contribution is another bill. They are two separate payments. Housing Provident Fund: This is a mandatory contribution for employees, typically shared between the employer and the employee.

For local staff, after signing the employment contract, the employer shall file employee’s information into company account (social contribution & housing fund). It will take about one to two working days. If the employee does not have individual social contribution and housing fund accounts, employer will need one week to apply and open the employee’s account first and then file the employee information.

Government/statutory health insurance is mandatory. However, the employer can purchase commercial health insurance program as supplementary insurance for employees.

• China adopts a mandatory system of pro rata hiring of disabled persons.
• According to the PRC Disabled Persons Security Law and the Rules of Employment of Disabled Persons, companies are obliged to hire disabled persons in proportion of no less than 1.5% of their total staff.
• The funds are used for vocational trading and job placement for the disabled.
• If any company fails to hire the requisite number of disabled persons, it is obliged to make contributions to the Security Fund for Disabled.

Rates by City:

• An enterprise with no more than 30 employees can be exempted from paying the Fund for the first three years after its establishment.
• The disabled persons’ employment security fund contribution is levied by the competent local tax bureau on a monthly basis, but it can be paid together with the social insurance contributions for the employees either on a monthly basis or annually.

Providing own Defined Benefit Plan is not a popular practice in China.

The employer can get additional supplemental insurances, but it is taxable on the individual. Supplemental insurances, such as medical, life, pension and accident can be provided as an additional benefit to attract or retain good people.

Provident funds and other similar benefits are not applicable.