Case 1: Norwegian employee going to work in China for two years

Karina had been asked by her Norwegian employer, ABC AS to work in Shanghai for a couple of years to lead a project. Karina was willing to take the next step in her carrier and started the negotiation with her HR Manager. Initially, she wanted to make sure that she would be compensated properly and that she would not lose the basic rights to her pension and insurance coverage that she was promised with ABC AS if she accepted the offer.

Company’s International Assignment policy document and the guidelines helped Karina to understand the basic requirements and compensation structure for international assignments in ABC AS. After a few hours of discussions with her HR Manager, she agreed to the following compensation and benefits;

• Assignment length is two years starting from 01.February
• Net salary based on the tax equalization policy, paid out of Norway
• Mobility allowance as a percentage of net home income
• A fixed amount of Location allowance (hardship allowance to compensate for relatively difficult living conditions)
• A cost of living adjustment of part of the net salary
• Continue coverage in Norwegian social security system (Folketrygden) on a voluntary basis
• Retain Karina’s membership in ABC AS pension plan and life insurance coverage for employees in Norway
• Two free home trips per year, housing, transport

Contract was signed and they went on with practical arrangements for the move.

Earning salaries in China on an L (“tourist”) visa or an X (“student”) visa is illegal. So Karina had to apply for a “Z visa” to enter China. Upon arrival, Karina needs to obtain her work and residence permits which will allow her to legally work in the country.

Karina left Norway on the 31st of January 2013 and arrived in Shanghai on the same day. She spent the first three days to make some practical arrangements and joined the office on Monday the 04th February.

Karina received very good services by the local relocation company, who assured that Karina moved into the apartment and bought all relevant household articles the first week after she arrived. She also attended a day-long cultural training course arranged by the selected provider in Shanghai. Karina enjoyed working in a multinational environment and found herself adapted to the local management style in an impressive speed.

Back home, the HR manager starts with the application for the social security membership in Norway as well as the practical issues related to tax deductions and cost reimbursement arrangement for Karina’s expense claims through ABC’s payroll in Norway. Everything seems to be in place and both parties are happy so far.

On a Monday morning three weeks after, the Tax advisor from Shanghai sends an email to HR manager, explaining the process they are about to start towards the Chinese tax/social security authorities. There is a cost estimate attached to the email, explaining the need for payments as soon as possible in China. The HR manager was not expecting this additional expense to be paid in China and he made a phone call to the tax advisor to get some explanations. Here are the facts that made the HR manager a bit confused;

• China has recently changed its law, where all foreigners who work in China and hold a working permit are formally required to participate in China’s social insurance policy. This means that Karina needs to pay social insurance premiums in China for pension, unemployment, work-related injury, medical care and maternity insurance.

Well, since there is no bilateral social security treaty between Norway and China, there is a double coverage and additional costs for ABC AS. The Company has to accept the additional cost in order to secure the appropriate benefits for Karina, as promised in her contract. Ok, the next item is Tax.

• Karina’s assignment is for two years and her assignment costs will be recharged to China. Karina’s assignment income is therefore taxable in China as from day 1 (see below)
• Norwegian based income prior to assignment will not be taxable in China. But this needs to be reported and taxed in Norway
• The tax year is the calendar year. Individual Income Tax (IIT) is assessed on a monthly basis. In addition, Karina should file an annual tax return by 31 March 2014
• Karina’s taxable compensation includes wages and salaries, bonuses, commissions, allowances and subsidies, taxes paid by the employer, stock options and any other income related to the individual's position or employment
• The Chinese employer is obliged to act as a "tax withholding agent" and is generally responsible for remitting tax payments to the tax authorities on behalf of Karina
• Certain fringe benefits could be exempt from IIT. These include housing, meal and laundry allowances, relocation allowance, home leave allowance, education allowance and motor vehicle expenses.

In practice, a careful allocation between cash/non-cash benefits prior to making Assignment compensation package could have saved ABC AS a considerable amount of tax costs in China. This is not good news to the managers of the project, - the HR manager needs to reconsider his initial cost estimate and make some accruals to meet the additional costs.

Good knowledge, reliable and constructive advice as well as thorough preparation and planning should enable your company a good financial and HR overview throughout the assignment period. It is our aim to become your provider in this respect.

You may send a request for informal meeting with us to see how we can help to organize your international assignments.