Hong Kong: Restricted shares issued under termination agreement not subject to salaries tax (court decision)

Tax treatment of termination payments expected to continue to be an area of dispute

Tax treatment of termination payments expected to continue to be an area of dispute

The Court of First Instance held that restricted shares released pursuant to an employment termination agreement are not subject to salaries tax.

The case is: Heath Brian Zarin v. Commissioner of Inland Revenue [2021] HKCFI 1846 (29 June 2021)


The taxpayer was employed by a bank under an employment letter, which afforded him a participation in the bank’s discretionary bonus scheme.  As part of his annual discretionary bonus, the taxpayer was granted restricted share awards which vested over a three-year period. The restricted share plan included “good leaver” provisions which permitted vesting following the cessation of employment, subject to the terms of a termination agreement. 

In 2013, the bank terminated the taxpayer’s employment on the grounds of redundancy.  Following a series of negotiations, in June 2013, the parties came to agreed terms and entered into a termination agreement that included a provision that all remaining restricted shares previously awarded to him would vest under the same terms and that any release of restricted shares granted in 2012 would be conditional on the taxpayer not committing a breach of the termination agreement.  If any breach, the unvested 2012 shares would be forfeited, and the taxpayer would have to repay the cash value of any shares vested.

The taxpayer complied with the terms of the termination agreement, and two sums arose from the 2012 shares vesting in 2014 and 2015.  The Inland Revenue Department (IRD) assessed these sums to salaries tax.  The taxpayer disagreed and contested the assessment.

The Board of Review found in favour of the IRD on the matter of the 2012 shares. The case was appeared to the Court of First Instance which dismissed the taxpayer’s appeal with respect to the 2012 shares on the grounds that it was not reasonably arguable as the release was derived from the good leaver provisions of the restricted share plan. However, the Court of Appeal subsequently granted leave to appeal, finding that it was reasonably arguable that the continuing release was derived from the termination agreement and that the taxpayer had provided fresh consideration for the release.  This led to the present action with the Court of First Instance taking a “fresh” approach to re-examine the facts, in particular, the substance of the termination agreement.


After re-examining the facts, the Court of First Instance found that the 2012 shares would not vest unless the taxpayer had complied with the termination agreement.  The “good leaver” term in the restricted share plan envisaged that a participant might have to provide fresh consideration to become entitled to vesting, and such fresh consideration might have nothing to do with employment.  The terms of the termination agreement identified the purpose for the release of the 2012 shares, which was to induce the taxpayer to provide long-term assistance in the bank’s litigation.  While noting that the case was borderline, the Court of First Instance came to view that the release of the 2012 shares was not taxable because it was not income from employment—it was “from something else.”

KPMG observation

The taxation of termination payments will continue to be a contentious matter in Hong Kong.  While the decision was favorable for the taxpayer in this case, the fact that the Court of First Instance previously held for the Inland Revenue Department illustrates that while the applicable legal principles are clear, their application can still be challenging. Tax professionals expect the taxation of termination payments to continue to be an area of dispute between taxpayers and the IRD. 

For more information contact a KPMG tax professional:

David Ling | +1 609 874 4381 | davidxling@kpmg.com


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