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China - Contracting Guide
A self-employed or freelance contractor is defined as performing a contract for the provision of various types of services and is not necessarily committed to a particular employer long-term under China Law.
A contract for provision of services exists as a separate class of contract which is distinguished from employment contract. The contractors under such contractual relationship shall assume any business risk themselves and are generally not protected by the Chinese Labor Law.
In China, there exists a wide variety of service contracts in various sectors of the economy, the mostly seen in the sectors such as construction, legal, architecture design, consulting etc. Although different service contract may contain the variable clauses to cater for the business needs, there are common terms that are widely presented in the contracts, namely, the goal of service rendering and the activities carried out by an independent contractor in achieving the goal, the compensation for service provision, the party which bears the obligation of social security contribution as well as the independent nature in the process of performing activities.
Similar to other jurisdictions, to assess whether the contract is concluded for the sake of independent service provision, rather than the virtual employment relationship, the Chinese courts will evaluate case by case with the following factors into the consideration.
(a) Nature of service provided
If the service rendering is indispensable and highly integral to the client’s business, the court may tend to interpret it as employment relationship. Rather than, the independent contractors tend to perform a unique task that is not in the normal course of client’s business.
(b) Permanence of the relationship
Under this criterion, the period of activities carried out may be taken into consideration. If longer period and more established relationship exists, it is more likely to be viewed as the employment relationship.
(c) Degree of control and supervision
The service provider should operate as an independent worker. The yardstick in measuring the performance of the service provider is completion of work based on the requirement prescribed in the service contract. The service provider is entitled to arrange the work at his/her will, and daily control and supervision by the client is usually not involved.
Under the service provision framework, the independent contractors retain control over schedule and working hours, the acceptance of certain tasks as well as the regularity and location of the work. They usually invest in the equipment used in undertaking the activities, furnish their own suppliers and cover other expenses related to their business.
Correspondingly, the client is not obliged to provide the guidance, instruction and training to the contractors to accomplish the goal.
(d) Payment for the services provided
In China, generally, there are two broad fee arrangements for service providers, e.g., a lump-sum amount or on a time-spent basis, usually on a monthly basis.
A lump sum is usually applied to the work on specific project, while the time-spent payment tends to be made for the task which lasts longer period, for instance, a couple of months, or over a year.
The independent service providers may discuss with their client on the payment approach based on their business needs.
(e) No commitment of the service provider to the client
Unlike the employees, independent contractors can opt to work for the multiple clients at the same time and offer their service to the general public without the commitment to any specific client.
(f) Validity of the contract
The service contract is concluded and executed once for a specific project and shall not be renewed repeatedly under normal condition.
The service providers shall be subject to 6% Value Added Tax (VAT) or 5% Business Tax (BT) depending on the different types of services rendered. According to the prevailing Chinese tax regulation, the monthly taxable minimum threshold for VAT and BT is RMB5000 to RMB20,000, that said, the service income obtained below the said threshold shall not be taxed while the entire amount would be liable for tax if threshold is exceeded. The local level tax authority is entitled to determine the exact amount within the above range with discretion.
Additionally, they are also liable for China Individual Income Tax (IIT) at progressive rate of 20% to 40%, with certain deduction as prescribed in the current tax regulations.
(h) Social security
In China, the social security contribution is generally withheld and paid to the government agency by the employer. The social security is applied to the Chinese national and expatriate employees legally employed in China with a legal working permit. The social security includes: Basic Pension; Basic medical Insurance; Work-Related Injury Insurance; Unemployment Insurance and Maternity Insurance.
Foreign independent service providers currently are unable to enroll the social security system in the name of individual social insurance participant. Meanwhile, to ensure that a contractor is not deemed as an employee, it is better than they are responsible for any insurance coverage, not the company hiring their services.
For more information, please contact Russell Brown.
6/F, Dongwai Diplomatic Building
23 Dongzhimenwai Dajie
Tel: +86 10 85321720
Fax: +86 10 85322746