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Hong Kong: Termination payment not subject to salaries tax (appellate court decision)

Hong Kong: Termination payment, salaries tax

The Court of Final Appeal issued a decision in favour of the taxpayer and concluding that a payment in lieu of bonus and share option gain arising from a separation agreement was not subject to salaries tax.


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The case is: Commissioner of Inland Revenue v. Poon Cho-ming, FACV No. 1 of 2019 (14 November 2019)

KPMG observation

The decision of the appeals court provides clarity with regard to the taxation of termination payments. The decision affirms the principle that a payment made in return for acting or being an employee is taxable, whereas a payment that is “for something else” is not. Furthermore, the principles apply even if the consideration is a payment in lieu of a lost bonus or the right to retain share options that would have otherwise been forfeited.

The long-running nature of the instant case, differing views, and sizeable body of case law on the taxation of termination payments demonstrate that it can often be difficult to apply the principles and that there is often a fine distinction between what is taxable as opposed to non-taxable.

In practice, the Inland Revenue Department when assessing the taxability of termination payments would probably continue to consider each case on its own merits.  Taxpayers, in determining whether a termination payment is subject to salaries tax may want to consider all relevant documentation and their interpretation. With the law being clear, the question becomes one of fact and substance.


The taxpayer was employed in Hong Kong as the group chief financial officer and executive director of a company. On 20 July 2008, the taxpayer’s employment was terminated pursuant to a separation agreement under which the taxpayer received several sums, including payment in lieu of notice, statutory long-service pay, a payment in lieu of unused leave, a payment in lieu of bonus (referred to as “Sum D”), and a payment in consideration of covenants made by the taxpayer.

Also, the separation agreement permitted the taxpayer to exercise share options granted to him during his employment. The vesting of the share options was accelerated to permit the taxpayer to exercise the options, which he duly did, and this gave rise to the share option gain in dispute. Of the payments, Sum D and the share option gain were the two items in contention before the Board of Review and courts.

Both the Board of Review and Court of First Instance decided in favour of the Commissioner. However, the Court of Appeal reversed, and decided in favour of the taxpayer (i.e., that Sum D and the share option gain were not taxable). The Commissioner appealed.

The Court of Final Appeal held that the lower appeal court was correct in holding that Sum D and the share option gain were not taxable. 

For more information contact a KPMG tax professional:

David Ling | +1 609 874 4381 |

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