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- Human Resources and Payroll in China 2016-2017 (5th Edition)
IIT Implication on Severance Payment
The PRC tax laws prescribe a special treatment for severance payments. As the terminated employee
may have no income in the comingmonths, the IIT burden on the severance payment is far lower than
if an employee received a similar amount as a salary or even as a bonus. Besides, the compensation
for termination upon the bankruptcy of the company is subject to IIT exemption.
Below, we explain the steps for making the calculation.
Step 1:
Decide on an amount for the total compensation package that will be provided to the
employee. The amount should be paid in one lump sum to the employee in order to be able to
take full advantage of the termination IIT calculation.
Step 2
: Deduct an amount equal to 300 percent of the annual social average salary of the previous
year for the region in which the company is based from the total compensation package.
Step 3
: Divide the remaining amount by the number of full years the employee has spent with the
company (maximum of 12).
Step 4
: Deduct RMB 3,500 (RMB 4,800 for non-mainland Chinese) and the social security/housing
fund contributions (if any) from the amount derived in step 3 above, decide the IIT rate and quick
deduction amount accordingly and then calculate the corresponding IIT.
Step
5: Multiply the IIT amount in step 4 by the number of full years served by the employee at the
company (maximum of 12). This will be the IIT on severance payment for the employee.
Note that any tax burden payable by the employee on money received as part of a termination package should be
deducted by the company before payment of the remaining amount to the employee.