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Taxation China China Beijing Q&A Concerning Mass-Layoff Severance Pay and Related Tax Issues
FAQChina Beijing Q&A Concerning Mass-Layoff Severance Pay and Related Tax Issues
| Q: |
Due to the impact of COVID-19 pandemic, our Beijing company has to end the employment contract with several employees, are there any issues we need to pay special attentions to? |
| A: |
Pursuant to the Labour Contract Law, for mass-layoff, the employer company shall explains the situation to the labour union or all of its employees 30 days in advance, solicits opinions from them and submit its layoff plan to the labour administrative department. Besides, the employer company shall pay severance. In addition, if there is no relevant clause in the labour contract, the employer company needs to notify the employee in writing 30 days in advance or pay the employee an extra one month's salary instead. |
| Q: |
How to calculate to severance pay? |
| A: |
Pursuant to the Labour Contract Law, severance pay is calculated based on the service period of the employee in the employer company. Severance pay amounts to one month’s salary per year of service. An employment period ranging from 6 months to 1 year will be counted as one year, if the service period is less than 6 months, it will be counted as half a year. |
| Q: |
Does the monthly salary include bonus and performance pay when calculating severance pay? |
| A: |
Yes, bonus and performance pay shall be included. According to the Regulations on Composition of Gross Salary released by State Statistics Bureau of P. R. China, gross salary includes hourly wages, piece-rate wages, bonus, allowances and subsidiaries, overtime wages and payments made under special circumstances. |
| Q: |
Does the monthly salary adopted when calculating severance pay refer to the salary of the latest months? |
| A: |
No. Pursuant to the Labour Contract Law, the monthly salary refers to the average of monthly salary of the employee for the latest 12 months prior to the termination of the labour contract. If the monthly salary of the employee is more than three times of the average monthly salary of Beijing for the previous year, the rate for the severance pay shall be three times of the average monthly salary of Beijing, and the number of years involved shall not exceed 12. |
| Q: |
Does the staff need to pay individual income tax for the severance pay? |
| A: |
According to the Notice on Connection of Preferential Policies after the Revision of the Individual Income Tax Law jointly released by the Ministry of Finance and State Taxation Administration, the one-off compensation income sourced from the termination of employment relations is exempt from individual income tax if the severance pay is not more than 3 times of the annual average salary of the previous year of Beijing. The amount exceeding 3 times of the annual average salary of the previous year of Beijing shall not combined into the current year’s comprehensive income and shall calculate individual income tax independently. |
| Q: |
What is the average monthly salary of Beijing in year 2019? |
| A: |
The official average monthly salary data of Beijing of the previous year will usually be released in June or July. If previous year’s average monthly salary data have not been released yet, you could adopt the latest released data. The average monthly salary of Beijing in Year 2018 is RMB7,855. |
| Q: |
Is it necessary to continue to pay social insurance and housing provident fund for the employee in the month when employment contract is terminated? |
| A: |
There are no specific official provisions on this issue. The employer company may refer to its internal regulations and rules. |
| Q: |
After the employment contract is terminated, is there anything the employer company need to do? |
| A: |
Yes, pursuant to the Labour Contract Law, the employer company shall issue a certificate of termination of the labour contract at the time of the termination and shall, within 15 days, undergo the formalities for the transfer of the employee’s personal file and social insurance account. Furthermore, the employer company shall keep the copy of a terminated employment contract for at least two years for reference. |
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