What are the circumstances under which employee shared-based benefits from employer or company setup in Hong Kong are chargeable to Tax


Starting with the blog we will discuss on calculation of rental values and understanding the conditions that are necessary to fill for exemption of housing benefits from salaries tax. Then we will move forward on the discussion of the application of salaries tax on some other employee shared-base benefits.  

In a Yau Wah Yau case (2006), the contradictory proofs were produced by the taxpayer, so due to this reason it was observed by board of revenue that there was any possession for land agreement. At this point Court of Appeal was agreed that, in order for rental refund to be non-chargeable to tax, a written possession for land agreement is not necessary. Soon there can be oral or written possession for land agreement between two parties. But due to some other reasons, Court of Appeal was agreed with the decision of board of revenue.

In the case of Robertshaw (2007) it was seen that, it totally depends upon the objectives of two parties at time of payment by employer to employee that whether this payment is refund of rent or not. In the above described case, rent was paid by a taxpayer to corporation owned by him and his wife in order to purchase a boat. This rent was later refunded by his employer. When housing benefits were computed for purpose of tax, the tax payer was given the 10% privileged treatment. After sometime of happening this event, his employer changed this policy for rental refund. And according to new policy no rental refund was to be provided by him. Only financial assistance was to be provided by him in respect of property owned by employee in the form of vehicle related to a large corporation. And this financial assistance provided by employer was taxable in full by Inland Revenue department. And this assessment was supported by High court.

Now let’s have a look at the case D 23/05 similar to Robertshaw. In this case it was observed that, a corporation was controlled and used as residence by a taxpayer. A boat was owned by that corporation in the form of corporation vehicle and the financial assistance for payment of mortgage was provided by the employer for purchasing of this boat. It was explicitly stated by the employer that this financial assistance was not provided in term of rental refund. But on the other side it was the stance of employer that in spite of policy of employer, the financial assistance should be entitled to 10 % preferential tax treatment as this assistance was provided by employer as rent to corporation. After judging the case it was deduced by board of revenue department that payments by employer were just financial assistance not rental refunds.

In a case D 34/12, a company named as C that was opening a business in Hong Kong, employed a person T. The wife of person T, Madam A had a property and that person rented her property for residence. After renting of this property by Madam A, the taxation department of Hong Kong started to apply property tax assessment on Madam A. This property tax assessment was also applied on the income that was derived by A by renting his property to her husband T. Then it was also considered by the Inland Revenue department that the reimbursement that is given to the employee T by company C is not a rental refund but it is the financial assistance in the form of cash allowance. And according to Section 9 (1) (a), these cash allowances that are given by employer or incorporate HK company to its employee are taxable. Since madam A and person T were husband and wife so it was the stance of board of revenue that the possession of land that both A and T entered into should not be one touched at arm’s length. And in a natural way the obligation of parties, content of possession for land agreement and procedures for signing the agreements must not be same as ordinary contracts between two parties. But it cannot be concluded by someone from above reason that there was no possession of land relationship between two parties. there was a fact in that madam A rent out her property to her husband in order to pay up the motorgage. And in order to rent out the property by her this fact was the commercial reason.  

As seen in D 35/12. In this case it was observed that a possession of land agreement was made between two parties in which T participated as tenant and her mother as landlord. It was finding of the inland revenue department on this case that by way of rental refund, T was not provided with the place of residence. On this finding of inland revenue department T put an allegation that, she paid sums in the form of rent to her mother. This statement of T was not accepted by IRD and it was considered by them that, these sum paid by T to her mother could well be something else like household expenses, contribution for maintenance, the payment for motorgage in respect of concerned property. But in case even if rent is paid by T to her mother, T was unable to present that intentions of her employer as he was to pay the sum as rental refund to her at the time of payment. So by viewing above mentioned arguments the appeal of T was dismissed by the inland revenue department.

Shared-Based benefits for Employee

The shared based benefits of employee may be assessable to salaries tax:

  • Which is specific charge for share option as in Section 9 (1) (d) of Hong Kong tax law.
  • As per a ‘perquisite’ within Section 9 (1) (a) as described in case Weight 19.

Under Section 9 (1) (d), computable income of a person in a corporation, include any benefit that is obtained by assignment, exercise or release of share option. These may have obtained by a person as an employee of other or that corporation or as the holder of the office. Given below is the procedure to calculate the amount of gain that is taxable under Section 9 (4) of Hong Kong tax law.

States

Taxable Amount

Option released/resigned

Consideration for release/assignment of choice less cost of option.

Exercise of option

The ratio of market value at the time of getting shares to the cost of shares and options.

But here is some check to avoid the double taxation system that according to Section 9 (5) of Hong Kong Tax law, no charge under the head of ‘perquisite’ under Section 9(1) (a) would be imposed if above described benefits are charged earlier under Section 9 (1) (d) of law.

The Section 9 (1) (d) of Hong Kong tax law is not applicable when a person obtains an option and is only employed by a corporation that may be working as incorporate HK company or any other type of company. In that case according to Section 9 (1) (a) of Hong Kong tax law, the perquisite if derived from the Hong Kong, will normally be assessable for salaries tax in assessment year in which person obtain that perquisite.

Exercising Option under Section 9 (1) (D) of Hong Kong Tax Law   

The gain is calculated at the time of exercising option under reference to the market value of shares. As discussed in the case D 66/94 that time was not held to be the time of sale. And the time of exercise in actual is the time according to D 66/94, when intention of taxpayer is notified by him to exercise the option. And this was the time that was provided as date, by the scheme upon which exercise of option becomes more worthy and effective.  

In a similar case D 43/99, it was held by board of revenue that in order to compute the gain, the market value on the date of allotment of these shares have to be taken as reference. And there is no need to consider the date of exercising the option. This was due to the reason that one cannot sell the shares before allotment of shares to him.

Under D 46/95, it was observed that lowest price adopted by Inland Revenue department was $2.55 at which shares were traded on the date.  By considering the slump effect, having large volumes of shared involved and regard to the condition of case the discount of 4 % was allowed by board of revenue department and it valued the share at $2.45.

In another case D 84/03, it was held by board of revenue department that, for computing the gain of taxpayers his personal circumstances were not relevant. As Section 9 (4) (a) of Hong Kong tax law used the clause ‘….. the amount that can be expected reasonably by a person to be obtained from sale’. In this case it was stance of taxpayer that as he was blocked from selling his shares earlier by insider dealing provisions so gain was to be computed by reference to much later date instead of current date. This claim of taxpayer was rejected by board of revenue department.

Now discuss example for salaries tax computation. A company named as A Ltd that was doing business in Hong Kong employed Mr. Lee. Mr. Lee was allowed by his employer to buy for a share option to take up 1,000 share in B Ltd. for $1 each on 1 April 2014. B Ltd. was parent company of A Ltd. On 1 April 2014, the market values of the shares were $2 each in B Ltd. Under a consideration of $3,000 Mr. Lee sold this option to Mr. Cheung. This option was sold out on 3 March 2016. The gain would be taxable in the assessment year 2015to 16 although the option was disposed of on 3 March 2016 by Mr. Lee. Following is the method to calculate the amount of gain that is assessable.

Mr. Lee

Computation of salaries tax

Assessment year 2015 to 16

 

Sales proceed of share option      $3,000

Less: Share option’s cost            ($1,000)

                                                    ---------

Total assessable income       =   $2,000

In another example we will have discuss on another case. The name of director of company C Ltd. is Mr. Chan. C Ltd. was doing business in Hong Kong.  Mr. Chan was given an opportunity to buy 1,000 shares in C Ltd. as a part of an incentive schemes. The cost of each share was allocated $2. On 1 June 2013, an amount of $100 was paid by Mr. Chan for the share option. After exercising the share option on 1 July 2014, the shares were sold out by him on 1 January 2016. The market values of share on various dates are given below in the table.

Date

Action taken by Chan

Market value determined of each share in C Ltd.

1 June 2013

Option acquired

$3

1 July 2014

Option exercised

$4

1 January 2016

Shares sold out

$5

The gain of Mr. Chan is taxable in assessment year 2014 to 15 as the he exercised the option on 1 July 2014. The assessable income for Mr. Chan is calculated as follow.

Mr. Chan

Computation of salaries tax

Assessment year 2014 to 15

 

On date of exercising option, market values of share = ($4 * 1,000) = $4,000

Less: Cost of Option = ($100)

          Share option’s cost = ($2 * 1,000) = ($2,000)

Total cost = ($2000 + $100) = $2,100

Total assessable income = ($4,000 - $2,100) =   $1,900

In order to compute the gain for tax purposes, the cost of shares and options are to be subtracted from open market value of the shares. In order to compute cost of shares many things have to be kept in mind that may include stamp duty, any contribution and other charges that are to be included on sale and person who is willful for opening a business in Hong Kong should be aware of these rules to avoid any legal consequence in future.

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