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Employee assignment between Germany and China - the social security agreement ensures transitional security in one's home country's social security system

by Frank Dissen

 

Since April 4, 2002 the bilateral social security agreement between the Federal Republic of Germany and the People's Republic of China has been in force, ensuring fundamental social protection for temporarily dispatched employees.

 

In essence, an employee is obligated to pay social security in the area where he/she actually carries out his/her work (so-called "territorial principle"). But in order to avoid double security and the thereby attached double contribution payment in Germany and China for dispatched employees, the aforementioned social security agreement was finalized. The scope of application reaches legal pension and unemployment insurance in both countries, regardless of employee`s nationality.

 

Social security obligation in China

Since October 15, 2011 a social security obligation exists for all foreigners employed in China - including employees who are assigned to China for a limited period of time. The amount of contributions and specific procedure differs between the responsible local authorities. For a long time, payment of these contributions was not possible or very difficult, despite legal obligation. Yet the Chinese government continues to develop the administrative process regarding contribution payments for expatriates so that the desired participation from foreigners in the Chinese social security system is actually implemented in practice.

 

Foreigners who took up employment in China before October 15, 2011 are obligated to make contributions as of October 15, 2011. Foreigners who first took up employment in China after October 15, 2011 are obligated to pay their dues as of the initial month of employment. Therefore, some local authorities assess contributions retroactive even for periods where actual no payment was possible.

 

Possibility of exemption through social security agreements

Employees from countries with a social security agreement with China might be exempted from Chinese social security contributions. At the moment China has agreements with Germany, South Korea, Denmark, Finland, Canada and Switzerland. For employees who have been assigned from Germany to China for a limited period of time only, it should be possible in general to remain in their home country's social security system during their sojourn abroad, and simultaneously avoid paying contributions in the host state. Based on the social security agreement between Germany and China the exemption is possible for the statutory old age and unemployment insurance. The statutory health, nursing care and accident insurance are not part of the social security agreement. Since there is an obligation to pay into the health, worker’s compensation and maternity insurance in China, there might be a double contribution in this regard should both countries insist on withholding deductions.

 

The exemption from the Chinese old age and unemployment insurance requires that the regulations for an assignment defined in Art. 4 (Assignment) or Art. 8 (special agreement) of the social security agreement are fulfilled. Otherwise Art. 3 of the aforementioned "territorial principle" applies, whereupon an employee is subject to the social security regulations of the country wherein he/she performs his/her work. Should the requirements as per the agreement be in place, a certificate of coverage (VRC/D 101 or D/VRC 101) should be requested to bindingly allocate the applicable social security right. This is provided by the respective home country and can be provided for a maximum of 48 months. If a longer assignment is planned from the beginning or other requirements of Art. 4 (assignment) are not met, a special agreement (Art. 8) can be applied for - the maximum period is 8 years (5 years + 3 years extension).

 

Implications for foreign employees and companies

Foreigners who leave the respective country and would not like to maintain the local social security may request a refund of the paid employee contributions for pension coverage. However, the new social security system in China triggers higher costs at least for the companies. Furthermore, should the company omit to register the employees with the Chinese Social Security Authority and to pay the contributions, this might lead to high penalties and additional payments. Therefore, it is strongly recommended to review the social security requirements in China for each assignment.

Frank Dissen

Frank Dissen
Attorney, Fiscal consultant

 

 

 

 

 

WTS Steuerberatungsgesellschaft mbH
Taunusanlage 19
60325 Frankfurt am Main
frank.dissen@wts.de
www.wts.com/de/expatriates