An Overview of Employees’ Salary Payment and Tax Issues During a Company’s Shutdown

In China, when a company temporarily shuts down its production and operations, how does it affect its employees’ remuneration? Is the loss of work due to the stoppage deductible for Enterprise Income Tax filing? In this article, we shall briefly introduce the payment of employees’ salaries and the tax treatment of the company’s downtime for reference.

1. How to pay employees’ salaries when the company ceases work and production?

During a temporary business suspension or shutdown, the employment relationship between the company and the employee is not dissolved; therefore, the company should continue to pay salaries or living expenses to the employee as well as paying social insurance on time. What is the standard of payment of salaries during the shutdown? According to Article 12 of the Provisional Provisions on Payment of Salaries, if the shutdown is not due to the employee and is within a pay cycle (usually one month), the employer shall pay the employee’s salary according to the standard specified in the labor contract. If the period of shutdown exceeds one salary payment cycle, there may be two main cases to consider:

In the first case, if the employee has worked for the employer, the employee shall be paid a salary and the labor remuneration paid to the employee shall not be lower than the local minimum wage standard; in the second case, if the employee has not worked for the employer, it shall be handled in accordance with the relevant national/regional regulations. For example, the Regulations on Payment of Salaries in Jiangsu Province issued by the Jiangsu Provincial Government stipulate that if the employer does not arrange for the employee to work, it shall pay the employee a living wage of not less than eighty percent of the local minimum wage.

2. May the above provisions be only applied to certain employees?

A company may apply the abovementioned provisions of business shutdown to a department or a group of employees in accordance with its internal business arrangements, but not only to one or a few employees: i.e., not in a targeted manner. According to the typical labor dispute cases issued by the Ministry of Human Resources and Social Security and the Supreme Court, the above-mentioned shutdown treatment does not restrict the conditions of application to the entire shutdown of the enterprise: if the enterprise partially stops work, the treatment can be applied to certain employees without discrimination.

3. Is loss due to the suspension of work deductible for tax filing?

According to the provisions of the Enterprise Income Tax Law, all reasonable expenses actually incurred by an enterprise in connection to the generation of income, including costs, expenses, taxes, losses and other expenses, are allowed to be deducted when calculating taxable income. Therefore, the losses caused by the shutdown of the enterprise are reasonable expenses actually incurred by the enterprise in connection with the income obtained and could be generally deductible for Enterprise Income Tax purposes.

In addition, if asset losses occur, according to the Administrative Measures for the Pre-tax Deduction of Income Tax for Enterprise Asset Losses (SAT Announcement No. 25 [2011]), the following asset losses shall be reported to the tax authorities in the form of a list declaration for relevant deduction:

(1) Losses incurred by an enterprise in transferring or selling non-monetary assets at fair prices in the ordinary course of operation and management activities;

(2) Losses of various inventories of the enterprise;

(3) Losses of normal scrapping and cleaning of the fixed assets of the enterprise when they reach or exceed their service life;

(4) Losses of assets occurring due to normal death due to the enterprise’s productive biological assets reaching or exceeding their useful life;

(5) Losses incurred by enterprises in buying and selling bonds, stocks, futures, funds and financial derivatives through various trading venues and markets in accordance with the principle of fair market transactions.

Losses of assets other than those mentioned above shall be reported to the tax authority for deduction in the form of a special declaration. If an enterprise cannot accurately determine whether the asset loss is a deduction declared on the list, it may declare the deduction in the form of a special declaration.

In summary, after a company’s business shutdown, on the one hand, it can apply shutdown treatment to employees in accordance with the above-mentioned regulations to reduce the enterprise’s labor costs and ease the enterprise’s operating pressure, while on the other hand, it can also apply relevant tax reduction regulations to reduce the tax burdens in case of any additional expenses or loss incurred. If you have any other questions regarding the shutdown of a company, you’re welcome to contact us: info@dandreapartners.com.