Tax Implications: Employee

Economic compensation received in relation to termination of employment, either by the employer or employee, is taxable as a part of the employment income. In considering that the amount received could be relatively significant and the employee may not receive any fixed wages and salaries in the near future, such an amount could be spread over a period of no more than 12 months for PRC Individual Income Tax ("IIT") purposes.

For the economic compensation received by an employee due to the termination of the employment contract by the employer in view of the corporate restructure or the layoff policy for State-owned enterprises, the amount could be taxed under the spread over method up to 12 months. In addition, if the compensation is lower than 300% of the local average annual salary of the previous year, the PRC IIT could be exempted under the current PRC regulations.

The position towards the spread-over treatment and the tax exemption amount varies from city to city and clients are advised to check with their local tax bureaus to determine local practices.

Tax Implications: Employer

Not all costs and expenses incurred by PRC enterprises are deductible. Only reasonable expenses and related expenses incurred in the ordinary course of business for production of income and not prohibited under the PRC Enterprise Income Tax Law ("EIT Law") are tax-deductible.

Under the current PRC EIT Law, all reasonable staff termination expenses incurred by the company are 100% tax-deductible for EIT purpose.

Employers Filing and Withholding Responsibilities

Similar to the regular salaries and wages, an employer is responsible to withhold the IIT liabilities and perform the PRC monthly IIT withholding filing on its employees for all termination-related payments. In addition, pursuant to the Administrative Law of the People's Republic of China on the Levying and Collection of Taxes (revised in 2001), if an employer fail to perform its withholding responsibility, the tax bureau will collect the overdue tax from the taxpayer directly. However, it may impose late filing penalties of 0.5-3 times of the tax overdue on the withholding agent, ie the employer.

If an employer does not file the employees' information to the tax bureau and this is found out by the tax bureau, the amount paid to the individuals may not be considered as a tax-deductible item for EIT purposes.

China will collect house- and land-price appreciation taxes more "strictly." New State Administration of Taxation circular signals more robust tax-collection after four years of relaxed tax-rules imposition. Strict collection of land appreciation tax will to some extent curb the windfalls of property developers by reducing the profits of developers. The Chinese government is working hard to rein in soaring home prices after they rose by a record 11.7 percent in March this year.

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