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Understanding China's severance tax rules—and why the old "divide by months" method no longer applies.

If you're an expat receiving severance pay from a Chinese employer, you might be wondering: "Why can't I spread this income over several months to reduce my tax?"

It's a fair question. Some of you may have heard from colleagues or old online articles that severance pay can be averaged over the number of months you worked. But here's the truth: that method no longer exists.

Let me explain how it actually works now—and why the old rule is gone.

The Current Rule

Under current policy (財稅〔2018〕164號), severance pay is taxed like this :

---The first part: Any amount up to 3 times of the local average annual salary is completely tax-free

     ---The excess: Anything above that is taxed separately, using the comprehensive income tax rate table—but not averaged over months

You might recall there was a different rule. Indeed under the old policy (國稅發〔1999〕178號), severance pay could be divided by the number of years you worked, taxed at lower tax rates.

But here's the key point: that policy expired when 財稅〔2018〕164號 took effect on January 1, 2019.

Here's something many expats miss: the rule only applies to the termination of the labor relationship between an individual and the employer.

If your contract simply ends and is not renewed (勞動合同終止), the tax treatment is different. In some cases, the payment could be treated as regular salary and taxed in the month you receive it—potentially at a much higher rate .

If you're not being "terminated" in the legal sense, you may not qualify for the severance tax benefit at all.

Have questions about your specific situation? Call our hotline at 86+189 1629 8482 (English service available).