Discussion on Employee Inbound and Outbound Assessing of Vested Shares of Company Incorporation HK and Tax Administrative Matters of Employee Departing from Hong Kong


We will be discussing in this blog that how two different approaches named as ‘upfront’ and ‘back-end’ that are used for the assessment of vested shares and we will also see the tax administrative matters that are related to the employee that want to migrate or permanently departure from Hong Kong in order to work overseas or for some other personal reasons.  

A person named T was employed in a group company in Hong Kong on 1 May, 2012. By subjecting to the vesting period he was given 5,000 shares by his employer. Then later on 1 July 2015, he presented his resignation to the company. The 5,000 shares that were given to him by employer were vested in him on 1 May 2016. On 1 May 2016 the value of vested share was $A. According to the Section 11D (b) provision (ii) of Hong Kong tax law the value of vested shares that was $A is to be included in the assessment of T for the assessment year 2015 to 16.

Residents having Non Hong Kong Employment

Shares are perquisite accruing to an employee if these are subjected to a vesting period. These are perquisite accruing in the year assessment in vesting takes place. The value of shares for an employee who is subjected to time basis allocation, should be included in the other taxable income of employee for that year assessment. And this time allocation factor that is relevant to that assessment year will be used in order to ascertain the income that should be assessed for taxation purpose in Hong Kong. The factor is determined by equation given below

The situation based on facts between share option and share award is not the same. Share option is the period that involve vesting period but may be exercised by an employee a few years after vesting of option. The period when options are exercised in order to ascertain the portion of the gain that is chargeable, a time allocation factor in vesting period is adopted by reference to the days-in days-out. Unlike share option this approach is not appropriate for cases of share award. It is not necessary to specifically apply the allocation factor at the time of vesting if it is accepted that at the time of vesting, perquisite accrues, in Section 8 (1) and 11B DIPN 38 (revised), the year of vesting is the year when perquisite accrues to an employee.

An example to understand this statement, a person named as T was employed by a company in Hong Kong. In subject to the vesting period the employee T was granted with 1000 shares from his employer, on 1 May 2009. But there was a condition imposed on the employee that if these vested type of shares could in case that T continued to be employee of his company on vesting date. The 5,000 among all the shares were vested in T, on 1 May 2011 while rest of the shares were vested in him on 1 May 2012. The respective number of days of stay of employee in Hong Kong and outside the Hong Kong as a part of offshore company incorporation are given below in tabular form.

 

(A)

(B)

(C)

%

End of Year

Hong Kong Days

Non Hong Kong Days

Total days in and outside Hong Kong

(A)/(C)

31 Mar 2010

275

90

365

75

31 Mar 2011

260

105

365

71

31 Mar 2012

250

116

365

68

31 Mar 2013

255

110

365

70

    

After some negotiation the employee T and assessor were agreed on a point to assess the vested shares through back-end approach.

Given below are the assessment procedure of share-award benefits.

  • Other remuneration of T in assessment year 2011 to 12 and the value of first 5,000 vested shares is to be included and 250/366 of this value is to be about for the tax.
  • While remaining 5,000 vested shares in assessment year 2012 to 13 are to be included and 255/365 of their worth is about to tax.

Employee cases that are Inbound

An employee that is having employment overseas may have been granted with the vested shares before he/she got an assignment employment in company incorporation HK. Such shares are also subjected to the vesting period. It is clearly stated by the term of the share award that, vesting of shares will depend strongly on the period of employment if after taken of such employment or assignment shares are vested in him. The Inland Revenue department can agree on the point to exclude the portion of gain on time allocation referable to the vesting period. This is only applicable before employee is transferred to Hong Kong under back-end approach. In the reference taken from DIPN 38 it is not stated clearly that, in the year of vesting whole the benefit has to be included.

A group of company outside Hong Kong employed an employee named as T, on 1 September 2010. With subject to the vesting period he was given the 10,000 shares by his employer. If person T continued to be the worker of company, then only that type of shares should be able to vest in him. T was transferred into another group in offshore incorporations HK limited within the same company on 1 August 2011. It was accepted by Inland Revenue department that T has non Hong Kong employment even though he was transferred in Hong Kong, among 10,000 shares 5,000 shares were vested in T on 31 August 2011. The vesting period having these shares were 365 days in total. This period in exact date was from 1 September 2010 to 31 August 2011. The total number of days in the vesting period were 31 days. These include the days only after transfer of T to Hong Kong. This period in exact date for first 5,000 shares was from 1 August 2011 to 31 August 2011. The remaining 5,000 shares were vested on 31 August 2012. The total number of days in the share vesting time period were having 731 days. This period in exact date was from 1 September 2010 to August 31, 2012. After transfer of person T to Hong Kong the whole vesting time period days for remaining 5,000 shares were 397 days. This period in exact date was from 1 August 2010 to 31 August 2012.The respective number of days of stay of employee in Hong Kong and outside the Hong Kong are given below in tabular form.

 

(A)

(B)

(C)

%

Time Period

Hong Kong Days

Non Hong Kong Days

Total days in and outside Hong Kong

(A)/(C)

1 August 2011 to 31 March 2012

166

78

244

68

Year ended 31 March 2013

255

110

365

70

After some negotiation the employee T and assessor were agreed on a point to assess the vested shares through back-end approach.

By assuming the following points:

  • The value of first 5000 vested shares was $A on 31 August 2011.
  • And the value of remaining 5000 vested shares was $B on 31 August 2012.

The calculated amount that is to be included in the assessment of share option would be

  • $A * (166/244) * (31/365) for assessment year 2011 to 12.
  • $B * (255/365) * (397/731) for assessment year 2012 to 13.

Employee cases that are Outbound

During the time his/her of assignment or employment of an employee in Hong Kong, share may be granted to employee having non Hong Kong employment. But the share that are granted to him and subjected to vesting period are vested in him after he is transferred to another group or company outside the Hong Kong. The value of the shares that are granted to employee and are attributable to the vesting period should be assessed for implementation of tax before going out of the country Hong Kong. And also this vesting of share will depend totally on the employment time period uncertainty a methodology of back end is appropriate. The value of shares that are given to him by employer would be included in the year of resignation of an employee if that employee receive the shares under the award after this of his resignation. DIPN 38 (revised).

In the following example, a group of company in Non Hong Kong employed a person T. With subject to the vesting period, employee was given the 5,000 shares by his employer on 1 October 2013. But there was a condition for the vesting of shares in employee that he should continue the employee of that group on the date of vesting. T was transferred to another group in offshore incorporations HK limited within same company on 1 July 2015. This group was working outside Hong Kong. 5,00 shares were vested in T on 1 October 2015. The vesting period for these shares were 730 days in total. This period in exact date was from 1 October 2013 to 30 September 2015. The total number of days in the vesting period before transfer of person T outside Hong Kong were 638 days. This period in exact date was from 1 October 2013 to 30 June 2015 for the remaining 5,000 shares. The respective number of days of stay of employee in Hong Kong and outside the Hong Kong are given below:

 

(A)

(B)

(C)

%

Time Period

Hong Kong Days

Non Hong Kong Days

Total days in and outside Hong Kong

(A)/(C)

1 April 2015 to 31 June 2015

65

26

91

71

                      

After some negotiation the employee T and assessor were agreed on a point to assess the vested shares through back-end approach.

By assuming the following points:

  • The value of vested shares was $A on 1 October 2007.

The calculated amount that is to be included in the assessment of share option would be

  • $A * (65/91) * (638/730) for assessment year 2015 to 16.

One should have clear understanding of these approaches in order to create a company in Hong Kong and he/she should be able to negotiate on the basis of these approaches to avoid any inconvenience in the future.

Phantom shares plan

The employee is given a number of share in the Group Company or company of which he/she is employer under an incentive scheme that involve ‘hypothetical or phantom shares’. In linked with the value of such shares the employee receives the future cash bonus from the company. If no actual value is passed to the employee, then no tax is assessed at the time when this hypothetical shares are allocated to him by employer company. As long as bonus is paid to him by the employer company, it would be taxed along with the other income of employee in that year of payment, in DIPN 38 (revised).

 

Tax administrative matters of Employee migrating from Hong Kong

Benefits for Share Options 

A gain might be assessed for implementation of salaries tax if it is realized from the assignment, exercise or release of share option that an employee is to departure permanently from Hong Kong. The inland revenue department as a favor allows a taxpayer to have the liability ascertained due to national exercise of option by having a view of finalizing salaries tax liabilities of such person before his/her departure from Hong Kong to work in offshore company incorporation. In accordance with the Section 9 (4) (a) of Hong Kong, a liability would be accepted by the Inland Revenue department if it is finalized on the basis of gain. And that gain would have been realized if the option has been exercised on a day among any of seven days in a week. But this exercising should be done before the date of submission of tax return of a person for the final assessment. This final assessment is only applicable to the assessment year in which a taxpayer has to depart permanently from Hong Kong.

According to the DIPN 38, if the concerned person has an employment of outside Hong Kong, and there is a condition imposed on the option and in respect of which on the date of national exercise the vesting period has not expired then the gain should be computed on such basis that vesting period should seem to be ended on that date.

Comments: Leave Comment

* The email will not be published on the website.