The severance benefit should be paid when the dismissal of employee. Is such a payment to be the subject to PIT or is it accrual base of USC for employer?
According to Art.44 of the Labor Code of Ukraine of 10.12.1971 (hereinafter − the Labour Code) in case of termination of employment contract:
- on the grounds specified in para.6 of Art.36 and paras.1, 2 and 6 of Art.40 of the Labor Code, the severance benefit should be paid to the employee in an amount not less than average monthly earnings;
- in case of call to military service or entry into military service, referrals for alternative (non-military) service (para.3, Art. 36 of the Labor Code), the severance benefit should be paid in the amount of two minimum wages;
- if the owner or authorized body violated the labor law, collective or employment contract (Articles 38 and 39 of the Labor Code), the severance benefit should be paid in the amount established by the collective agreement, but not less than three months average earnings;
- on the grounds specified in para.5 of sec.1 of Art.41 of the Labor Code, the severance benefit should be paid in the amount not less than six months average earnings.
PIT
In accordance with paragraphs 14.1.48 of the Tax Code of Ukraine of 02.12.2010, №2755-VI (hereinafter − TCU), wages for the purposes of sec. IV of the TCU are the main and additional wages, other incentive compensation payments, which are paid (provided) to the taxpayer in connection with the employment relationships under the law.
In accordance with paragraphs 163.1.1 of the TCU, the subject to tax of a resident is total monthly taxable income.
According to paragraphs 164.2.18 of the TCU, the total monthly (annual) taxable income of the taxpayer includes other incomes, except specified in Art.165 of the TCU.
In accordance with paragraphs “з” of paragraphs 165.1.1 of the TCU, the total monthly (annual) taxable income of the taxpayer does not include the single annual amount of financial assistance provided under the Law of Ukraine “On the status of war veterans, guarantees of their social protection” of 22.10.1993, № 3551-XII.
Incomes in the form of severance benefits paid to the employee in accordance with Art. 44 of the Labour Code in the event of termination of employment contract are not included in the list of incomes determined by Art.165 of the Labor Code.
Taking into account the mentioned above, the specified severance benefits are included into the total monthly taxable income of the taxpayer in accordance with paragraphs 164.2.18 of the TCU.
According to para.167.1 of the TCU, the tax rate is 18% of the tax base on incomes accrued (paid, provided) (except as specified in paragraphs 167.2-167.5 of the TCU) including, but not exclusively in the form: wages and other incentive and compensation payments or other benefits and rewards accrued (paid, provided) to the payer in connection with labor relations and under civil contracts.
Therefore, severance benefits in connection with the dismissal of the employee should be taxed at the rate of 18%.
On the war tax
In accordance with paragraphs 1.2 of para.16-1 of subsection 10 of sec. XX of the TCU, the subject to the war tax is incomes determined by Art.163 of TCU, including total monthly (annual) taxable income.
Thus, the amount of severance benefit, which is mandatory benefit to the employee of a company in connection with the termination of their employment relationships, is the subject to the war tax at the rate of 1.5%.
USC
According to para.1 of sec.1 of Art.7 of the Law of Ukraine “On the collection and accounting of the unified contribution for obligatory state social insurance” of 08.07.2010, № 2464-VI as amended and supplemented, the accrual base of the unified contribution for obligatory state social insurance (hereinafter – USC) for companies, institutions and organizations, which use individuals work under an employment agreement (contract) or otherwise, required by the law, is the amount of accrued wages for each insured person by types of payments that include basic and additional wages and other incentive and compensation payments, including in kind defined under the Law of Ukraine “On payment for labour” of 24.03.1995, № 108/95-ВР.
Determining of the types of payments related to the basic, additional wages and other incentive and compensation payments in the calculation of the unified contribution is provided by the Regulations on wage statistics, approved by the State Statistics Committee of Ukraine of 13.01.2004, № 5 (hereafter − Regulations №5).
Paragraph 3.8 of sec.3 of Regulations № 5 determined that the amount of severance benefits in the event of termination of employment contract was included in other payments that to be not included in payroll.
In addition, para.4 of sec.I of the List of payment type paid at the expense of employers, on which the unified contribution for obligatory state social insurance is not charged, approved by the Cabinet of Ministers of Ukraine of 22.12.2010, № 1170 determines that the USC is not to be charged on severance benefit in the event of termination of employment contract.
Therefore, the amount of severance benefits accrued by the employer to the employee in case of dismissal is not the accrual base of the Unified Contribution.
