13 March 2022 marked the 50th anniversary of full diplomatic relations between the UK and China. As we have all witnessed, China’s economic growth has soared over this period. At that time, it had rapidly transformed into the world’s manufacturing powerhouse and had started to take a lead in certain sectors such as information technology and some high-end manufacturing. In the last two decades, Chinese companies have expanded overseas and established a global brand presence, with the likes of Xiaomi and TikTok now becoming household names. Meanwhile, capital-rich Chinese businesses have been acquisitive in the West bringing premium brands to the country’s buoyant consumer market, and a number of well-known UK brands are now Chinese owned.
Nevertheless, Chinese businesses are still in the early stages of international expansion in comparison to their Western counterparts. We are also seeing more SMEs (Small and Medium Enterprises) and fast-growing Chinese businesses coming to the UK who may be less familiar with some of the challenges of doing so. These include certain global mobility and expatriate related issues encountered specifically by Chinese businesses sending people to the UK for the first time, which can be easily prevented or mitigated with some planning.
Below we share the top five things to watch out for.
1. 52-week National Insurance Contribution (NIC) exemption
There is no social security reciprocal agreement between the UK and China. This means that, at a high level, Chinese expatriates seconded to the UK are entitled to a 52-week NIC exemption for both the expatriate as well as their employer.
Surprisingly, many of the UK subsidiaries and Representative Offices of Chinese companies seem to have missed this. Typically, these clients have only sent one or two people to the UK. Given the limited scale of their UK operation, they prefer to adopt a pragmatic and cost saving approach at the start and engage with a local accountancy firm. Such firms will typically not have experience of advising clients on the complexities of global mobility and expatriates. Costly NIC charges are then incurred which could have easily been avoided with some simply planning and experience of the relevant NIC exemptions.
If you have missed out, there might still be a chance to benefit from this exemption. We have undertaken several NIC reclaim exercises for Chinese clients where the expatriate meets the conditions and the claim is made within the administrative window.
2. Put a policy in place
In some cases, the UK is the first overseas expansion location for a Chinese business. If a Chinese business does not have much experience of operating overseas, then global mobility issues may not occur to them during the planning phase, and they would have signed off on a remuneration level for the expatriate without thinking about the impact of local income tax and social security (e.g. NIC) costs – let alone clarifying whether the remuneration is intended to be paid gross or a net package guaranteed. This can lead to an inevitable shock for the expatriate once they are on the ground and see the post-tax figure on their first payslip. Needless to say, it then takes more effort to unwind issues and brief headquarters, and a lot of the best scenario planning tools would no longer be available.
A policy also documents respective roles and responsibilities of the employee and employer; what happens if something goes wrong; what if the assignment is cut short or extended and so on. Pre arrival planning will enable you to set and determine clear budgets and importantly reduce costs through more effective planning.
It is easy to simply say ‘we recommend for companies to seek advice before sending your expatriate overseas’. However, the real problem is the lack of awareness of global mobility issues amongst many of these expanding companies. In this respect, I find it really helpful to line up with related intermediaries such as lawyers, Chambers of Commerce and governmental agencies such as London & Partners and the Department of International Trade in China. It is more likely that a company will give a heads up about their UK expansion plan to their local trusted advisors. By giving some key briefing notes to intermediary contacts in China, they can help make companies aware of the importance of seeking global mobility advice in the UK.
3. Chinese salary and social security contributions
Every now and then, a newly arrived Chinese expatriate tells me they have part of their salaries paid in China to keep paying to their Chinese ‘five insurance and one fund contribution’ social security pot. Often, they say to me: “This part of my salary is paid in China and already had Chinese tax deducted, so I don’t need to report them in the UK, right?”
Unfortunately, not so. The UK has a different set of tax rules to China so the conversation would then develop into a discussion about the relevant misunderstandings and statutory obligations they have in the UK – starting with how employment income is taxed in the UK, tax residency for instance is not purely determined by 183 days like in China and the UK has a special “Remittance Basis of Taxation” that can really benefit Chinese expatriates in many situations.
For example, if you are doing a housekeeping exercise in respect of your employer UK payroll obligations (PAYE) for expatriates from China, this would be one key point to check. Since keeping a continuous Chinese social security contribution is key for Chinese citizens, the majority of these expatriates would request that a small amount of salary is paid in China during their assignment in the UK so it can be subject to social security deduction. They may not realise that this may not be aligned with strict statutory obligations in the UK – this structure is often possible but again carefully planning is key. In addition, as mentioned above, there is no reciprocal agreement for social security so the Chinese social security contribution might be subject to UK income tax – and social security taxes (NIC) after the 52-week exemption period.
The Housing Fund Contribution is a complicated area and it is critical that you seek specialist advice from those with the right experience when putting them through a payroll and reporting on a tax return. There are traps everywhere but not if you are properly prepared and do some planning.
4. Balance on the collaboration style
Global mobility issues involve not just traditional expatriates who are sent to the UK but also a wide range of other related topics such as directors of UK companies that live in China, those visiting the UK by short business trips, cost planning and budgeting compliance obligations for the organisation and individuals including filing annual tax returns. As the international assignments progress and your international expatriate and international employee ‘population’ grows, there are always opportunities to review the arrangements and explore further efficiency based on the latest circumstances. This means that it would normally be best for the client and advisor to have a dynamic collaboration, frequently discussing ways forward together.
However, Chinese businesses are normally used to having a fixed fee package covering “everything”. Time spent basis fees can come across as a foreign (or even unfriendly and impersonal) concept for Chinese businesses who are just starting to venture out in the West. Some state-owned-enterprises need to have a consultancy budget approved ahead of the relevant financial year. In addition, the consultancy charge out rates in the UK are generally higher than Asia. As such, the expatriate on the ground and the global mobility advisor can end up in a situation where they identify an issue that needs to be sorted out really quickly, but have to go through a tremendous and lengthy process to get the extra budget approved by the Chinese headquarters.
Therefore, the UK global mobility advisor should highlight to the client the ‘unforeseeable’ as much as possible – at the beginning of the engagement to help manage expectations at Chinese Headquarter level. While the advisor could try working out an inclusive service package based on the current scenario it is sometimes not realistic to think about all possibilities, but effective planning will help reduce many of the surprises later – and it is still prudent to leave some room for flexibility during the assignment.
5. Don’t forget Chinese filings
China introduced its new Individual Income Tax rules from 1 January 2019, and one of the key changes is the requirement for individuals to report their worldwide earnings.
While worldwide taxation has always been the legal requirement, the latest IIT Reform led to the roll out of a reporting procedure that explicitly requires individuals to make the relevant submission.
We are now in the third year of Chinese self-assessment season, with the deadline coming up on 30 June 2022 for the 2021 calendar tax year. For those Chinese expatriates with UK earnings, this corresponds to the UK 2020/21 tax year. There is still plenty of time to speak with your global mobility advisor in China (or the UK) if no arrangement has been put in place yet.
Would you like more information?
If you would like to discuss any of the above, please get in touch with Winnie Cao using the details on this page.
For more information, news, and insights on investing in the UK from China, please visit our China desk hub.