Increased Tax Exemption on Severance Pay and its Potential Impact on Job Exit Negotiation

In line with common understanding, severance pay is legally defined under Section 5 of the Labour Protection Act B.E. 2541 (1998) (the “LPA”) as the money the employer pays to the employee upon the termination of employment, in addition to other monies that the employer agrees to pay the employee. Generally, the employee will be entitled to severance pay upon termination of his/her employment if he/she is terminated not for cause (termination for cause refers to termination for any of the grounds specified under Section 119 of the LPA, e.g. committing a serious offence/violation of the work rules, regulations or the employer’s lawful and fair order; dishonestly performing his/her work; intentionally committing a criminal offence against the employer; and willingly causing damages to the employer). The rate of severance pay under the LPA is calculated based on the employee’s total length of employment with the employer and his/her latest rate of wages. The same rates of severance pay had previously been applied for a long time, ever since implementation of the LPA in 1998 until the amendment to the LPA in 2019 by virtue of the Labour Protection Act (No. 7) B.E. 2562 (2019), which came into force as of 5 May 2019. This amendment increased the ceiling of the severance pay rate from 300 days’ wages to 400 days’ wages. 

Likewise, the rules for tax exemptions on severance pay had also been in place and remained unchanged for a long time, ever since 1999. However, this year, Ministerial Regulation No. 394 (“New Regulation”) issued under the Revenue Code, announced on 17 July 2024, has adjusted personal income tax exemptions for severance pay received by employees in the event of termination of employment. The exemption of personal income tax for severance pay (excluding severance pay received due to retirement and the end of the employment contract) in the amount not exceeding wages for the last 300 days, but not exceeding Baht 300,000, has been increased to cover severance pay in the amount not exceeding wages for the last 400 days, but not exceeding Baht 600,000, This finally puts it in line with the current applicable rate of severance pay under the LPA. This has been enacted to help alleviate the suffering of employees who have been terminated by their employers not for cause, so that they can receive severance pay as a lump sum of money (without being subject to personal income tax, or subject to the lower amount of personal income tax) for living expenses, which is expected to improve the quality of life of workers. This New Regulation will be effective retroactively as of 1 January 2023. In the case where the employee has already filed a tax return and paid tax for severance pay that is exempt from personal income tax according to the New Regulation, he/she can file an updated tax return to claim a tax refund within 3 years from the last day of the deadline for filing such tax return.

It should be noted that, given the benefit in receiving severance pay from a taxation perspective, and taking into consideration the other benefits the employee will receive from the Social Security Fund in the event of being terminated by the employer compared to when the employee resigns or mutually separates from the employer; it is expected that that an employee will typically opt for termination of employment by the employer during negotiations regarding their job exit package whenever the opportunity arises. Therefore, the employer should be prepared for these scenarios; proper documentation should be executed and kept in good order to protect the employee from any associated risks arising from termination of employment, including but not limited to a claim for unfair dismissal, following termination of employment, even if the termination is made to accommodate the employee’s request.

This is intended merely to provide a regulatory overview and not to be comprehensive; it is NOT a provision of legal advice. Should you have any questions on this or on other areas of law, please do not hesitate to contact the following: 

Chanakarn Boonyasith
Partner
Pattaranun Hanwongpaiboon
Associate

Authors