Understanding the Role of a PEO in China

This article is a holistic view to understanding the role of PEO in China and how it facilitates foreign businesses that are interested in investing in China. In particular, this article covers the following aspects:

  • Introduction and rules for a PEO.
  • The advantages and disadvantages when contracting with a PEO.
  • Tax requirements, costs and formal requirements to work with a PEO.

Let’s take a look at each of these in detail:

What does PEO stand for?

PEO means ‘Professional Employment Organization,’ and it aims to simplify business processes for foreign entities that choose the labor dispatch model to hire their workforce. It is common for foreign companies to find the labor laws in China complex and time consuming. This especially holds true in the case of WFOEs (Wholly Foreign-Owned Enterprise), the development of which requires a lot of paperwork and formalities.

In order to simplify and understand staff leasing processes in China, a more practical route is to seek the expertise of a PEO that is accustomed to the local labor rules, freeing up your time to launch your business in China. The legal terms between a PEO and foreign company are normally contractual in nature and can be extended for as long as they are needed.

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What is a PEO ?

Foreign-based companies usually lack a proper structure in China, particularly in their initial stages peo in chinaof establishment. To properly operate and hire a team, they require guidance from a China-based entity that cannot only locate but hire staff members on their behalf. This much-needed assistance is available in the form of PEO, i.e., Professional Employment Organization as these entities are fully licensed to perform business activities in China.

PEO, as a subsidiary, is entitled to carry out all the administrative and human resource related tasks on behalf of the foreign-based company, which includes payroll management, visa processing, tax compliance and submission, expense management, social insurance, office rental, etc. A PEO also deals with all the legal formalities on the foreign company’s behalf, hence making it easier for the company to establish and strengthen its presence in the market.

Rules for a professional employment organization (PEO)?

Under China’s labor dispatch law introduced by Ministry of Human Resources and Social Security (MOHRSS) on 1st March 2014 under  “Interim Regulations on Labor Dispatch” (MOHRSS Order No. 22), foreign-invested companies are likely to face many challenges in hiring a local workforce in China. A local PEO can be contracted to overcome these challenges given that they are licensed to hire employees for host companies. PEO companies also possess the credibility, experience and market reach that a new foreign company, just entering China, is unlikely to have.

Benefits of contracting with a PEO?

Advantages of PEO services:

  • As an expert in the local market, a PEO is aware of the changing labor laws as well as the administrative problems.
  • It acts as a local structure on your company’s behalf, in China.
  • Labor dispatch services are the most user-friendly and cost-effective solution when entering China.
  • You get more time to focus on improving your business strategy.
  • You are still the owner of your workforce through a legal agreement, even if its outsourced to a professional employment organization.
  • Since this model is non-taxable as a local structure, your company will likely pay lesser taxes.

Downsides of contracting with a PEO?

Below are the limitations that a foreign company faces after getting into contract with a PEO company:

  • Though you are entitled to invoice for services, you cannot do the same for goods. A PEO will, however, be able to invoice clients for goods both in China and abroad.
  • Your labor dispatch partner needs to be very professional and up-to-date regarding the ever-changing rules in China, to avoid penalties or restrictions.
  • You are limited to request a credit from the bank.

Cost of contracting to a PEO?

The fee associated with initiating a contract with a professional employment organization contributes to the cost. Additionally, the expenses of the employees and the salary that is paid through the PEO are added to the total cost.

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Time required to hire new employees

The time depends on the nationality of the new hire. If the selected candidate is Chinese, you can expect the process to be completed within a month or two. However, the processes take a bit longer for overseas employees, due to the visa requirements.

Tax paying requirements

In short, there are two kinds of taxes associated to professional employment organizations.

  • Social Security: This needs to be paid for China’s local workforce. However, no contribution needs to be made for the foreign employees. A PEO could offer medical insurance to overseas employees if that is the part of its policy.
  • Income Tax: The PEO company pays this through withholding tax. However, there’s a difference in the rules for China’s local and overseas employees regarding the payment of income tax.

Ultimately, PEO services eliminate a lot of the risks and overall costs for a foreign-invested company. Using labor dispatch services through a PEO company provides a foreign entity reassurance when entering the Chinese business market, especially when it lacks a formal legal business entity. It is generally helpful to continue using PEO services until you are ready to formally launch your business as a WFOE.

The information contained in this article is valid on June 5th, 2018. For updated information, please contact us via email at contact@fdichina.com.