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Social Security and Taxation in China

Both celebrated and criticized, China’s social security system offers various types of welfare and support to locals and expats alike. However, the system is still in development. The taxation system, on the other hand, is fully-developed but quite overwhelming. Luckily, we cover both topics at length.

China’s social security system is relatively new and many parts of it are still in development. Initially, the system was only accessible to urban workers and subsequently rolled out further to cover employees in rural areas as well. As of October 2011, expats are also included in the system. Still, the system is not easy to navigate and variables and contributions vary strongly by locality and sector. Moreover, as it is often difficult to tell whether a certain policy is managed on a local or on a federal level, finding the person responsible for answering your questions can be quite a challenge. Thus, only a good third of foreigners have joined China’s welfare system.

Social Security – What Is Included?

Under the current policy, social security in China is divided into three overall categories: social assistance, welfare services, and social insurance. The latter is the largest category and contains five different insurance types: pension, medical insurance, unemployment insurance, work injury insurance, and maternity insurance. They are all financed through contributions made by the state, employers, and employees. The pension system, in particular, is a fairly new concept. China has traditionally been, and still is, a country where children take care of their parents and grand-parents. This might be another reason why pension policies in rural areas lag far behind those available to urban residents.

Income Tax and Who Pays for What

To most expats, China’s tax system must seem like an impenetrable jungle of different rates, applicable taxes, and complicated rules of exceptions. This is also due to the fact that much like social security, China’s individual income tax has been subject to constant change. In the current system, it is mostly your pay scale, as well as the duration of your stay in China, that determines which tax rate applies to you. Moreover, China is one of the two countries which charge tax on their residents’ worldwide income. Aside from the individual income tax, which is probably most important to expats, other taxes, including VAT and business tax, might influence your financial situation in China as well.

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