Personal income tax withholding on dispute settlement payments after termination of labor contracts

Currently, labor disputes arising from unilateral and unlawful termination of employment contracts due to economic reasons or changes in organizational structure and technology are increasingly common. In order to minimize the financial damage caused by unlawful termination, enterprises aim to reach a dispute settlement agreement with the employees during the court proceedings, with an optimal settlement amount for both parties. Accordingly, in cases where the parties agree on the settlement amount to fully resolve the dispute, enterprises and employees need to pay attention to the regulations related to personal income tax (“PIT”) to ensure maximum benefits and compliance with tax obligations. 

1. Regulations on payments to employees for dispute settlement 

First and foremost, the amount agreed upon for dispute settlement between the enterprise and the employee in this article is understood as a payment made by the employer after the termination of the employment contract during the resolution process at the Court. Accordingly, this payment is intended to conclude the entire lawsuit at the Court.  

Pursuant to the regulations related to wages, salaries, allowances, and subsidies specified in Circular 111/2013/TT-BTC dated August 15, 2013, of the Ministry of Finance guiding the implementation of the personal income tax law4, the dispute settlement amount in this case has a basis to be determined as a payment outside of wages and salaries, not belonging to any type of allowance or subsidy, and also outside the provisions of the Labor Code 2019 and the Social Insurance Law 2024. Therefore, determining the PIT rate or the enterprise’s obligation to withhold PIT on the dispute settlement amount paid to the employee is not determined according to the partially progressive tax schedule. 

In actual court practice, the payment amount to the employee during the mediation process to settle all arising disputes is diverse, depending on the enterprise’s scale and the employee’s salary level, the settlement amount can vary high or low. Consequently, the lack of direct regulations governing the PIT rate in this situation risks creating ambiguity and conflict between the enterprise and the employee, and potentially exposing the enterprise to violations of tax withholding and declaration obligations. 

2. PIT Withholding Rate on the Dispute Settlement Amount 

According to the guidance in Official Letter No. 3168/CT-TTHT dated April 04, 2019, from the Ho Chi Minh City Tax Department5, the PIT withholding rate on the dispute settlement amount can be determined as 10% of the total payment amount from VND 2,000,000 per payment onward. As mentioned above, the dispute settlement amount, at the time the employee has received the termination decision and is no longer employed, has a basis to be determined as a payment outside the provisions of the Labor Code and the Social Insurance Law. 

Accordingly, similar to the guidance of the Ho Chi Minh City Tax Department, in Official Letter No. 2130/CTHYE-TTHT dated May 11, 2023, from the Hung Yen Provincial Tax Department replying to an employer6, in cases where the employee has a termination decision and is no longer working at the time of payment, the enterprise shall withhold PIT at the rate of 10% of the total payment amount from VND 2,000,000 per payment onward. 

3. Key considerations 

During the dispute resolution process, enterprises and employees need to pay attention to the PIT withholding rate on the payment amount for dispute settlement to ensure optimal benefit and compliance with tax obligations. For the employee, accurately determining the actual net settlement amount contributes to maximizing financial benefits, especially if the agreed settlement amount is substantial or the employee desires the amount agreed upon to settle the dispute to be the net amount received. For the enterprise, clearly understanding the regulations on PIT withholding and declaration will help the enterprise ensure full and proper tax compliance. 

(4) Referring to Clause 2, Article 2 and Point i, Clause 1, Article 25 of Circular 111/2013/TT-BTC dated August 15, 2013, of the Ministry of Finance, which provides guidance on the implementation of the law on personal income tax, the law amending and supplementing a number of articles of the law on personal income tax, and Decree No. 65/2013/ND-CP of the Government, which provides detailed regulations on the implementation of a number of articles of the law on personal income tax and the law amending and supplementing a number of articles of the law on personal income tax

(5) Referring to Official Letter No. 3168/CT-TTHT dated April 04, 2019, of the Ho Chi Minh City Tax Department, https://ift.tt/I7ZOkV4

(6) Referring to Official Letter No. 2130/CTHYE-TTHT dated May 11, 2023, of the Hung Yen Provincial Tax Department, https://ift.tt/sgVQNwv 

Disclaimers:

This article is for general information purposes only and is not intended to provide any legal advice for any particular case. The legal provisions referenced in the content are in effect at the time of publication but may have expired at the time you read the content. We therefore advise that you always consult a professional consultant before applying any content.

For issues related to the content or intellectual property rights of the article, please email cs@apolatlegal.vn.

Apolat Legal is a law firm in Vietnam with experience and capacity to provide consulting services related to Dispute Resolution and contact our team of lawyers in Vietnam via email info@apolatlegal.com.



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