China’s business environment is highly regulated, with procedures that vary by region. Foreign employers must navigate approvals from MOFCOM, SAMR, and SAFE to establish a Wholly Foreign-Owned Enterprise (WFOE), followed by tax, social insurance, and PSB registrations. Employers must also localize contracts, comply with city-specific social security and IIT rules, and report hires to labor bureaus.  

Keep reading to learn more—and find out if using an Employer of Record (EOR) is a wise decision when entering the Chinese market.

Employer and Employee Taxes

Employment-related taxes in mainland China include Individual Income Tax (IIT) and mandatory social security contributions ("Five Insurances and One Fund"). Employers must withhold IIT and remit both employer and employee social contributions.  

Rates and contribution bases vary by city, typically capped at 300% of the previous year’s local average salary. Non-compliance can result in fines up to three times the unpaid amount.  

Individual Income Tax (IIT)

In China, Individual Income Tax (IIT) applies to anyone who stays in the country for 183 days or more in a year, including foreign employees, and is based on worldwide income. Non-residents are only taxed on income earned within China. Salaries are taxed at progressive rates, with a standard deduction of CNY 60,000 per year (CNY 5,000 per month). Additional deductions are available for expenses like child education, housing, and elder care.

Employers in China handle IIT by withholding it monthly using a cumulative method. This approach adjusts for changes in income over the year, helping to smooth out the employee’s overall tax burden.

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Bonuses and other one-time payments in China are often taxed separately from regular salary, usually at flat rates between 20% and 40%. However, updates to the cumulative withholding method have helped reduce the tax impact of these payments.  

For foreign employees, tax exemptions on expat allowances like housing and education ended in 2023. If considered a tax resident, they’re now fully taxed on worldwide income unless an extension under the old rules was approved.

Social Security Contributions (Five Insurances)

Social security contributions are required for all employees in China and are split between the employer and the employee. The exact rates depend on the city, but they’re usually based on the employee’s salary up to a capped amount—around three times the local average wage.  

On average, employers contribute about 20–30% of the salary, while employees pay around 10–11%. Some parts, like work injury and maternity insurance, are fully covered by the employer.

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Several cities have updated their contribution base limits. For example, Shanghai raised its upper cap to CNY 34,188 per month, and Beijing made similar adjustments for the period covering July 2024 to June 2025.  

Flexible or self-employed workers have more leeway—they can choose a contribution base between 60% and 300% of the local average salary, depending on their needs and budget.

Housing Provident Fund (One Fund)

The housing fund is a mandatory savings program in most Chinese cities, where both the employer and employee contribute matching amounts each month. The standard contribution rate ranges from 5% to 12% on each side, though in some cities like Shanghai, it can go up to 14% with approval.  

The contribution base usually matches the one used for social insurance, capped at about three times the local average salary. Employees can tap into their housing fund to buy a home, renovate their property, or use it later in retirement.

Examples by city (2025):

• Beijing: 12% contribution rate (employer and employee)

• Shanghai: 7-14% contribution rate (employer and employee)

• Guangzhou: 5-12% contribution rate (employer and employee)

• Shenzhen: 5-12% contribution rate (employer and employee)

Employment Contracts

Employment contracts in China are legally required and must be in writing. For foreign employers, contracts must be in Chinese (bilingual versions are acceptable) and signed within one month of the employee’s start date.  

Fixed-term contracts must convert to open-ended after two consecutive renewals. Termination rules are stricter, and changes to retirement age may impact contract length and pension contributions. Electronic contracts are valid if properly verified.

Types of Contracts

Fixed-Term: For a specified duration (e.g., 1-3 years), common for initial hires. After two consecutive fixed-term contracts, employers must offer an open-ended contract unless the employee requests otherwise.

Open-Ended (Non-Fixed Term): Provides indefinite employment until retirement or valid termination, offering greater job security. Required after 10 years of service or two fixed-term renewals.

Project-Based (Completion of Assignment): Ends upon task completion, with no probation allowed. Severance is required upon expiry.

Part-time contracts (up to 4 hours/day, 24 hours/week) may be oral, with no probation or severance, but payment must occur at least every 15 days.

Mandatory Clauses

Contracts must include the following essential terms to be valid:

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Additional recommended clauses: Probation details, training, confidentiality, non-compete, and references to company policies.

Probation Periods

Probation allows employers to assess fit, with easier termination (no severance if recruitment conditions unmet). Length varies by contract term:

• Less than 3 months: No probation.

• 3 months to 1 year: Up to 1 month.

• 1-3 years: Up to 2 months.

• 3+ years or open-ended: Up to 6 months.

During probation, employees must be paid at least 80% of their full salary and never below the local minimum wage. Employers can’t extend probation periods or use them repeatedly to avoid full employment terms—doing so can lead to fines.

Non-Compete Clauses

Non-compete clauses in China apply mainly to senior managers, key technical staff, or roles involving confidential information. They can last up to two years after termination and must include clear limits on scope and location.  

Employers are required to pay monthly compensation during this period—at least 30% of the employee’s previous average salary if no amount is specified. If the employer fails to pay, the employee can legally ignore the clause. Non-solicitation clauses are also enforceable but don’t require compensation.

Termination and Renewal

Termination must be backed by valid, documented reasons—like serious misconduct or poor performance after training—and employers must notify the union. If termination isn’t the employee’s fault, 30 days’ notice or one month’s pay in lieu is required.  

Severance is typically one month’s salary for each year worked, with caps for high earners. Certain groups, like pregnant employees, have added legal protections. For fixed-term contracts, if the employee asks to renew and it’s their second term, the employer may need to offer an open-ended contract.  

Salaries, Wages, and Payroll

Salaries in mainland China must meet local minimum wage standards, which are set and updated by each region. Several provinces have raised their rates, with Shanghai now at the highest monthly minimum of RMB 2,740.  

Payroll is usually processed monthly, with employers responsible for deducting taxes and social security.  

Minimum Wages

Minimum wages in China are set by each province and classified into tiers based on local economic conditions—Class A typically covers major cities. They apply to full-time workers, while part-time roles have hourly rates set at no less than 80% of the monthly equivalent. Recent updates include increases in Shanghai and other regions to support consumer spending.

Examples for major regions (monthly/hourly in RMB):

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Part-time workers receive at least the hourly rate, paid no less than bi-weekly.

Average Salaries

Salaries in China vary by city, industry, and experience. Tech and finance roles in Tier-1 cities often pay RMB 15,000 to 25,000 per month. While the official urban average is around RMB 29,300, typical salaries range from RMB 7,400 for entry-level positions to over RMB 18,000 for experienced professionals. Expat employees usually earn 20–50% more.  

Recent salary growth has been modest, with about a 5% increase driven by demand in AI, green tech, and e-commerce.

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Payroll Practices and Compliance

Payroll cycles are monthly, with payments due by the last working day. Electronic transfers are standard, and payslips must detail gross pay, deductions, and net amount. Key requirements:

• Deductions: Withhold IIT (progressive 3-45%), employee social contributions (~10-11%), and housing fund (5-12%). Employer adds their share (20-30%).

• Bonuses: 13th-month pay is customary (equivalent to one month's salary, often at year-end). Performance bonuses common in sales/tech.

• Overtime: 150% for weekdays, 200% for rest days, 300% for holidays; capped at 36 hours/month.

• Compliance: must register with local tax and social security bureaus and file monthly reports. Digital payroll systems are now encouraged, and high earners may see IIT changes. Using HR software or an EOR can simplify and automate compliance.

Consult the Ministry of Human Resources and Social Security or professionals for precise calculations.  

Employee Holidays and Leave Entitlements

China now observes 13 paid public holidays, with Lunar New Year’s Eve and May 2 recently added. Work on these days must be paid at 300% of the daily wage. To create longer breaks, weekends are sometimes shifted to workdays—if no time off is given in return, those days must be paid at 200%.  

Annual leave is based on factors like tenure, health, and family status. Foreign employers should include these entitlements in contracts and check for local differences, such as extended paternity leave in Shanghai.

Public Holidays

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Overtime is paid at 300% on public holidays and 200% on adjusted rest days if no time off is given. For flexible or comprehensive work hour systems, overtime rules may vary.

Annual Paid Leave

Employees with at least one year of total work experience are entitled to paid annual leave, prorated if needed. Unused leave must be carried over (up to one year) or paid at 300% of the daily wage. Employers can only deny leave for valid business reasons. Entitlements are as follows:

• 1 – 10 years: 5 days

• 10 – 20 years: 10 days

• 20+ years: 15 days

Part-time workers aren’t entitled to statutory annual leave, though it can be included in contracts.

Other Leave Entitlements

• Maternity Leave: 98 days base (paid), plus 15 days for difficult birth, 15 per additional child. Provincial extensions (e.g., 60 days in Shanghai, up to 158 total). Fully paid via social insurance; job protection.

• Paternity Leave: 7-30 days (paid), varies by province (e.g., 15 in Beijing, 30 in Guangdong). No national minimum.

• Sick Leave: 3-24 months based on tenure and illness severity; paid at 60-100% salary via insurance/employer. Medical proof required.

• Marriage Leave: 3 days base (paid); additional 7-10 days in some provinces for late marriage (over age 25 for men, 23 for women, though "late" policy phasing out).

• Bereavement Leave: 1-3 days (paid) for immediate family death.

• Weekly Rest: At least one day off per week (usually weekends), paid.
  

Employee Benefits

In China, mandatory benefits include the “Five Insurances” and “One Fund,” with contributions split between employers and employees. Rates vary by city and are capped at 300% of the local average salary. Employers typically pay 30–45% of gross salary.

Mandatory Social Insurance (Five Insurances)

All employees in China, including most foreigners, are covered by mandatory benefits unless exempt by treaty. Contributions are based on salary, capped at three times the local average. Employers cover work injury and maternity in full.

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Recent updates include better disability coverage under pensions and adjusted contribution caps, like Shanghai’s new upper limit of CNY 34,188. Flexible workers can choose bases from 60% to 300% of the local average salary.

Housing Provident Fund (One Fund)

The housing fund is mandatory in most cities, with employer and employee each contributing 5–12% of the salary base (up to 14% in some areas). It can be used for housing, rent, or retirement. Not always required in rural areas.

Examples by city:

• Beijing: 12%

• Shanghai: 7-14%

• Guangzhou: 5-12%

• Shenzhen: 5-12%

Supplemental and Voluntary Benefits

While not required, extra benefits are common to attract and keep talent—especially younger workers who value work-life balance. Many companies are focusing on wellness perks to support employees during economic uncertainty.

• Bonuses: 13th-month pay (one month's salary, year-end); performance bonuses in tech/sales.

• Allowances: Housing subsidy (RMB 1,000-3,000/month in Tier-1 cities), meal/transport (RMB 300-500/month), car allowance.

• Health & Wellness: Annual health checks (mandatory for some roles), mental health support, fitness subsidies, gym memberships.

• Education: Tuition assistance, training programs.

• Other Perks: Flexible hours, remote work options, enterprise annuity (supplementary pension), commercial insurance (e.g., life/health beyond statutory).

• Trends: Increased focus on mental health (counseling apps), cost-of-living adjustments (e.g., inflation-linked raises ~5%), and family support (childcare subsidies) to combat turnover.

Competitive packages in tech/finance include stock options or ESOPs for expats.

Employee Dismissal

Employee dismissal in China is strictly regulated and must follow legal grounds with proper evidence and procedures. Disputes go through labor arbitration first. Wrongful termination can lead to reinstatement or double severance.  

Recent rules further restrict unilateral terminations and require open-ended contracts after two renewals, making dismissals more challenging.

Grounds for Dismissal

• Immediate Unilateral Dismissal (No Notice/Severance): For serious violations, such as breaching company rules, dereliction causing substantial damage, fraud in contract formation, criminal liability, or dual employment harming the employer.

• Unilateral Dismissal with Notice: 30 days' written notice or one extra month's salary, for incompetence (after training/job adjustment), inability to work post-illness/injury (after medical treatment), or major objective changes (e.g., relocation, merger) making contract performance impossible.

• During Probation: Easier, for not meeting requirements, but must be evidenced; no severance.

• Mutual Agreement: Negotiated; severance if employer-initiated.

• Automatic Termination: Employer bankruptcy, license revocation, closure, or contract expiry (unless renewed).

• Economic Layoffs: For restructuring, production difficulties, or economic changes

Employees can resign with 30 days’ notice, or 3 days during probation. If the employer breaches the contract, they can leave immediately and may claim severance.

Procedures

• Documentation: Provide written notice explaining grounds, evidence, and employee's rights; inform trade union (if any) and consider their input.

• Notice Period: 30 days for applicable cases; alternative: extra month's pay.

• Final Settlement: Pay outstanding wages, unused leave (at 300% rate), and severance within timelines; issue termination certificate.

• Disputes: Employee can file arbitration within 1 year; employer bears burden of proof.

Severance Pay

Severance in China is mandatory in most cases, including dismissals with notice, mass layoffs, mutual terminations (if initiated by the employer), and contract non-renewals—unless the employee refuses an offer on equal terms.

The amount is based on the employee’s average monthly salary over the past 12 months, capped at three times the local average wage. Payment is calculated as follows:

• 1 month’s salary for each full year of service

• 0.5 month for less than 6 months

• 1 full month for 6–12 months

• Maximum payout: capped at 12 months for high earners

Severance is tax-free up to three times the local average salary; any excess is taxed progressively.

Protected Employees

Certain employees in China are protected from dismissal unless there's immediate cause or a mutual agreement to leave. This includes those recovering from work-related or non-work-related illness or injury, pregnant employees, those on maternity or breastfeeding leave, and employees with 15 or more years of service who are less than five years from retirement.

Mass Layoffs

For mass layoffs (20+ employees or 10% of staff), employers must give 30 days’ notice to the union or staff, consider feedback, and report to local authorities. Priority should go to long-term employees or those with dependents. Laid-off staff get rehire priority for six months.

Work Visa

Foreigners need a Z visa for paid work in China, which must be converted to a residence permit after arrival. Classes A, B, and C still apply for top talent, professionals, and temporary roles. Visa-free entry doesn’t allow employment. While steps have been streamlined for high-skilled workers, core rules remain unchanged.

Eligibility

Work visa applicants must be 18–60 years old (flexible for skilled roles), healthy, have no criminal record, and meet job requirements—usually a degree and 2+ years’ experience. Class A applicants need advanced skills in priority sectors. Minimum salary starts at CNY 5,000/month.

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For family members applying for an S visa, additional documents include an invitation letter and proof of relationship.

Application Process

1. Work Permit Application: The employer applies online through the Service System for Foreigners Working in China. Approval typically takes 7–15 days, faster for Class A talent.

2. Z Visa Application: Once approved, the employee applies for a Z visa at a Chinese embassy, consulate, or CVAC abroad. Processing takes about 4–5 working days, with express options available.

3. Entry and Residence Permit: After receiving the Z visa, the employee must enter China within 30 days and apply for a residence permit at the local Public Security Bureau within 30 days of arrival. The residence permit is valid from 90 days up to 5 years.

Costs: Visa fees vary (e.g., USD 140 for U.S. citizens). Work permits typically cost CNY 400–800. The full process usually takes 1–3 months.

Duration and Renewal

• Z Visa: Single-entry, valid for a 30-day stay upon arrival.

• Residence Permit: Must be obtained within those 30 days; valid for 90 days to 5 years and can be renewed.

Renewals must be submitted at least 30 days before the residence permit expires. Extensions are allowed if there’s a valid reason. Overstaying can lead to fines of up to CNY 10,000 per day.

Company Registration

To hire in mainland China, foreign employers must establish a legal entity, as direct employment without one is not allowed. This involves registering with authorities like SAMR, MOFCOM, and local bureaus. The process typically takes 3–8 weeks and requires minimum capital starting around RMB 30,000. An easier alternative is using an Employer of Record (EOR), which allows hiring without setting up a local entity.  

Company setup is regulated by the Company Law and Foreign Investment Law, which offer streamlined approvals and tax incentives for reinvested profits in key sectors.  

Types of Entities

Common structures for foreign investors (Foreign-Invested Enterprises or FIEs):

• Wholly Foreign-Owned Enterprise (WFOE): 100% foreign-owned, full control, suitable for manufacturing, services, or trading; can hire staff and generate revenue.

• Joint Venture (JV): Partnership with a Chinese entity (equity or cooperative), required for restricted sectors; shares profits/risks.

• Representative Office (RO): Easiest setup, limited to research, liaison, and promotion; no revenue generation or direct hiring (staff via agencies).

• Foreign-Invested Partnership (FIP): Flexible partnership without separate entity, but personal liability.

• Foreign-Invested Commercial Enterprise (FICE): For trading, retail, franchising; acts as agent/distributor.
  

Requirements

• Business Scope: Must align with approved activities; restricted/encouraged sectors per the Catalogue of Encouraged Industries.

• Registered Capital: No minimum for most (e.g., RMB 30,000 for multi-shareholder LLCs, RMB 100,000 for single-member, RMB 500,000 for FICE); fully paid within 5 years.

• Location: Prefer Free Trade Zones (e.g., Shanghai, Shenzhen) for incentives like tax breaks and simplified customs.

• Shareholders/Directors: At least one shareholder; legal representative (often a foreigner) required.

• Negative List Compliance: Removes manufacturing barriers, opens telecom, education, health.
  

Process

1. Choose Structure and Location: Align with goals; conduct feasibility analysis.

2. Name Pre-Approval: Submit Chinese name (unique, descriptive) via SAMR online.

3. Prepare Documents: Notarize/legalize foreign docs; submit to AMR.

4. Apply for Business License: Online via SAMR for "5-in-1" license (business, tax, social security, stats, org code) with Unified Social Credit Code.

5. Obtain Company Chop/Seal: Register with Public Security Bureau.

6. Open Bank Accounts: Foreign capital and RMB accounts; inject capital.

7. Register for Taxes/Social Security: Within 30 days; VAT status (13% goods/6% services), social insurance.

8. Additional Licenses/IP Protection: Sector-specific permits (e.g., food, medical); register trademarks with CNIPA (first-to-file system).

9. Post-Registration: Adjust Articles of Association (AoA) for pre-2020 companies by January 1, 2025, to comply with New Company Law.
   

Documents Needed

• Approved company name.

• Shareholder list with ownership.

• Organizational structure (board, managers, legal rep).

• IDs/passports (shareholders, reps).

• Articles of Association (scope, management, profits).

• Registered capital/investment details.

• Business address proof (lease).

• Business plan (objectives, budget).

• Parent company docs (if subsidiary), translated/notarized/legalized by home country and Chinese embassy.

Foreign docs require embassy legalization.

Costs

• Registered Capital: As declared (e.g., RMB 30,000-500,000+).

• Fees: Notary/legalization ~RMB 1,000-5,000; license ~RMB 500-2,000; agent services ~RMB 10,000-50,000.

• Taxes: Corporate income 25%; withholding 10% on dividends.

• Incentives: 10% tax credit on reinvested profits (2025-2028) for encouraged sectors; land use flexibilities.

Total setup: USD 10,000-50,000+ depending on scale.

Opting for EOR When Expanding in China

An Employer of Record (EOR) is a third-party service that legally employs workers on behalf of a foreign company. In China, this allows businesses to hire local or expat staff without setting up a legal entity. The EOR handles payroll, tax compliance, social insurance, benefits, and even immigration support.

This model is ideal for quick market entry, small teams, or testing the market. While setting up an entity in China can take 2–4 months and cost up to RMB 100,000, onboarding through an EOR can often be done in just 5 to 14 days.

Benefits

• Speed: Onboard employees in 1-2 weeks for quick market entry.

• Compliance: Manages Labor Contract Law, PIPL, and social insurance, reducing risks like fines.

• Cost-Effective: Saves on entity setup and administrative costs.

• Expertise: Provides local knowledge on hiring and cultural nuances.

• Flexibility: Supports hiring across China or Asia; easy to scale or transition to an entity.

• Retention: Offers competitive benefits like the mandatory "five insurances" and housing funds.

When using an EOR, make sure they own a local entity—this can be verified through their Unified Social Credit Code—and that they follow PIPL-compliant data storage practices. For foreign hires, Z visas and work permits are mandatory, with strict rules on roles and qualifications.  

Whether you're testing the market or scaling your team, Knit lets you hire confidently—without the need to set up a legal entity. Contact us to learn more.

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