Compliance in overseas assignment of Chinese employees

China’s headline foreign economic policies such as “going global” and the Belt and Road Initiative (BRI) are encouraging companies and their staff to participate in cross-border co-operation projects in foreign countries or regions.

But employers may find that hiring outbound labour packs certain unique complexities and challenges compared with regular at-home employment. Lack of either awareness or knowledge of these different situations can easily lead to labour disputes.

Based on China’s legal framework as well as the authors’ practical experience and precedents, this article analyses common risks plaguing outbound labour compliance, pointing Chinese companies planning outbound assignments in the right direction.

According to the Notice of the Ministry of Commerce on Strengthening the Classification and Management of Overseas Personnel for Outbound Investment Co-operation, there are three employment modes under which employees may be lawfully assigned overseas: foreign labour co-operation; outbound contract engineering; and outbound investment projects.

The company and employees enter into labour relations in all cases, except for foreign labour co-operation, under which a service relationship may be formed instead.

Companies qualified to undertake foreign co-operative businesses – namely foreign labour co-operation enterprises – may arrange for Chinese citizens to travel to foreign countries or regions to work for foreign companies in accordance with the Regulation on the Administration of Foreign Labour Co-operation.

Legally, the foreign co-operative company may form either a service or labour relationship with the employees. Determination of the legal relationship tends to follow the principle of substantive examination, focusing on whether any personal or economic affiliation relationship exists.

Companies qualified to undertake foreign contract engineering projects are required by the Regulations on the Administration of Foreign Contracted Projects and other relevant laws to enter into labour contracts with overseas-stationed personnel. This means that even with personnel recruited via labour intermediary agencies – with no direct labour contract signed – a labour relationship still stands.

In foreign investment projects, Chinese companies may assign their employees to overseas subsidiaries, branches, offices and other foreign entities. According to the above-mentioned MOC notice, and the Measures for the Administration of Corporate Overseas Investment, the companies and their overseas-stationed employees constitute a labour relationship as defined under Chinese law.

In terms of salaries and benefits, personnel stationed overseas often enjoy dual income from both domestic and overseas remuneration packages.

Where they form a labour relationship with the Chinese company, the overseas remuneration is usually combined with the domestic counterpart as a basis for labour payment. If the overseas salary is not paid in full or on time, a request for payment may instead be made to the company.

In cases where overseas-stationed personnel form a service relationship with the Chinese company but receive salaries and payment of social security provident funds from their Chinese company, the legal relationship may instead be determined as a labour relationship.

In terms of personal income tax, overseas-stationed personnel with dual income are also subject to double taxation, both in China and the host country/region. According to articles 1 and 7 of the Individual Income Tax Law, domestic income is subject to personal income tax, and the same applies to overseas income if the employee “is domiciled in China”, or “is not domiciled in China but has stayed in the aggregate for 183 days or more of a tax year in China”, regardless of whether a dual relationship exists. However, the portion of tax paid abroad may be credited against tax payable in China.

On 17 January 2021, the Ministry of Finance and the State Taxation Administration clarified the differentiation between domestic and overseas income of overseas-based individuals in the Notice on Individual Income Tax Policies Concerning Overseas Income, which further refines tax credits and ancillary provisions.

In terms of social security, according to the official reply of the Ministry of Human Resources and Social Security, Chinese citizens working abroad who have not cancelled their Chinese nationality may participate in Chinese social security. At the same time, most host countries/regions mandate foreign employees to participate in local social security schemes. Generally speaking, the social security contributions on both sides cannot be used to exempt from one another, and foreign-stationed personnel must often maintain dual contributions.

Since 2012, China has entered into bilateral social security agreements with 12 countries including Germany, South Korea and Denmark. In these specific circumstances, mutual exemption from paying relevant social insurance contributions may apply to overseas-stationed personnel, which to a certain extent resolves the dilemma of double contribution and mutual recognition.

Chinese employees must abide by the laws and regulations of the host country or region when assigned overseas. Apart from the above-mentioned information concerning remuneration, taxation and social security, this also includes the local labour law and requirements on visas and work permits.

In particular, many countries have set up thresholds for offshore labour to safeguard domestic employment. These include limiting foreign labour to certain industries, requiring a minimum percentage of local staff and setting labour market tests.

Unfamiliarity with these laws of the host country or region may prove costly in the form of legal risks and penalties.