Severance Pay Subject to Individual Income Tax in China

On May 14, officials from China’s State Administration of Taxation answered questions on several hot issues regarding ambiguities in tax payments, clarifying that individual income tax should be paid when an employee receives compensation for termination of their contract.

According to the government officials, if the one-time compensation offered to an employee after the termination of the contract does not exceed three times the local average annual salary of the previous year, the compensation is tax exempt. However, if the amount exceeds this threshold, then the exceeding part of the compensation is subject to individual income tax payment.

It was also clarified that compensation offered to an employee after the expiration of their contract and without renewal is also subject to personal income tax, as it is offered after a legal and natural termination of the labor contract, which does not fall into the above-mentioned tax-exempted category.

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