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What are the Tax Implications for Terminating an Employee?
22/09/2023
In Thailand, terminating an employee’s contract is a significant event for both employers and employees. It carries various legal and financial implications that demand attention. Depending on the situation, certain payments must be made to the employee. Furthermore, these payments may be subject to tax.
In this article, we look at the tax implications for terminating an employee in Thailand.
Key points
- In Thailand, an employer can terminate an employee’s employment at its discretion.
- Should the dismissal be made without a statutory cause, the company could be liable for a statutory payment to be made to the employee
- Certain payments are subject to tax
- Exemptions are available for severance pay of up to 10 months or 300,000 THB
- One-time payments of the tax owed are eligible for deductions.
What are the statutory causes for the dismissal of an employee in Thailand?
Thai law sets out several statutory causes a company can rely upon when dismissing an employee, for example:
- wilfully disobeys or habitually neglects the lawful commands of the employer,
- absents himself of services,
- guilty of gross misconduct,
- or otherwise acts incompatible with the due and faithful discharge of the employee’s duty.
In addition, Section 119 of the Labour Protection Act also stipulates the statutory causes as follows:
- performing the duty dishonestly or intentionally committing a criminal offence against the employer;
- wilful acts were done to cause damages to the employer;
- committing negligent acts causing serious damage to the employer;
- violating work regulations, regulations or orders of the employer which is lawful and just for which the employer has already issued the employee a written warning, except in a serious instance for which the employer is not required to give a warning;
- absenting from duty without justifiable reason for three (3) consecutive working days whether or not they are separated by holiday and;
- being sentenced to imprisonment by a final court judgment.
Should the employer terminate an employee using a statutory cause, the employer is required by the law to notify the reason for the termination by issuing a letter of termination of employment. Alternatively, a company may inform the reason for termination to the employee at the time of the termination. Failure to do so will mean that the employer cannot claim such statutory cause against the employee’s termination.
What are the required statutory payments for firing an employee?
Once the employee’s employment has been terminated, with or without statutory causes, the employee will be entitled to statutory payments.
| Statutory payments | With cause | Without cause |
| Wage until the employee’s last working day | Yes | Yes |
| Payment in lieu of advanced notice | No | Yes |
| Severance pay | No | Yes |
| Payment for unused annual leave | Only accumulated unused annual leave | Both accumulated and prorated annual leave |
| Other payments if any | If any | If any |
| Compensation for unfair dismissal | At the court’s discretion | At the court’s discretion |
What are the rates of severance pay in Thailand?
Section 118 of the Labour Protection Act states that the employer is required to pay severance to an employee whose employment is terminated without cause at the following rates:
Required monthly tax and payments:
| Years of service with employer | Rate of severance payment |
| 120 days to 1 year | The last 30 days wage |
| 1 -3 years | The last 90 days wage |
| 3 – 6 years | The last 180 days wage |
| 6 – 10 years | The last 240 days wage |
| 10 – 20 years | The last 300 days wage |
| 20 + years | The last 400 days wage |
Are there any additional payments that may be required?
The following payments may also be required to be paid by the employer upon terminating an employee, depending on the situation:
Payment for unused annual leave
Section 67 of the Labour Protection Act states that if the employer dismisses the employee without a statutory cause, the employer has to be compensated for the employee’s unused annual leave.
Compensation for Unfair Termination
Termination of an employee’s employment without a statutory cause may lead to an unfair dismissal claim being made against the company. Unfair dismissal cases can be brought before the Labour Court even though the employer has made all the required payments
Should the Labour Court view that the termination of employment is unfair, the Labour Court may order the employer to re-employ the employee. However, the Labour Court may believe that the employee and the employer cannot work together anymore. If this is the case, the Labour Court may order the employer to pay extra compensation i.e. compensation for unfair termination to the employee.
What are the tax implications for the payments when terminating an employee?
While some of the abovementioned payments are tax-exempt, others have a capped tax-free limit, and some qualify for special deductions. We will highlight some of the common scenarios.
Severance pay
Severance pay is subject to income tax. However, under the following conditions, can be exempt from tax in Thailand. Employees terminated without grounds are entitled to severance pay, up to THB 300,000 or 10 months tax-free. Any amount exceeding this is subject to income tax.
Employees who have worked for the same employer for 5 years or more may qualify for a special deduction. However, voluntary redundancy does not qualify for tax exemption, but a special deduction may still apply if the employee has worked for the employer for 5 years or more.
Deductions for one-time payments
Suppose an employee has worked continuously for one employer for 5 years or more before termination (whether voluntary or compulsory). In that case, they qualify for a special deduction for a lump-sum payment (e.g., gratuity, severance pay, or provident fund payout).
When calculating the employer’s withholding of personal income tax, two additional deductions from the employee’s income are applied:
- Deduct expenses equal THB 7,000 multiplied by the years of employment, capped at the income amount.
- Allow further expenses at a rate of 50% of the remaining amount.
Personal income tax will be determined using the special deductions as follows:
| One-time payment (THB) | Tax rate |
| 1 – 300,000 | 5% |
| 300,001 – 500,000 | 10% |
| 500,001 – 750,000 | 15% |
| 750,001 – 1,000,000 | 20% |
| 1,000,001, – 2,000,000 | 25% |
| 2,000,001, – 5,000,000 | 30% |
| 5,000,001 and up | 35% |
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