Hong Kong: Salaries tax treatment of share award; vesting vs. forfeiture (court decision)
Income in respect of shares granted to the taxpayer-employee accrued to him at the time that the shares were awarded
Vesting vs. forfeiture (court decision)
The Court of Appeal, in a decision affirming the judgment of a lower court, held that income in respect of shares granted to the taxpayer-employee accrued to him at the time that the shares were awarded, even though the shares were still subject to forfeiture. The decision concludes that the shares were not income from the taxpayer’s Hong Kong employment because they were awarded in relation to performance by the taxpayer while employed in the UK.
The Court of Appeal also concluded that dividends received from the shares are non-taxable because they were income from the shares, not from employment.
The decision confirms the distinction between:
- Shares awarded by an employer that are subject to vesting conditions to be met before an employee becomes the legal or beneficial owner of the shares and
- Conditions that may cause a later forfeiture of shares which are transferred to an employee (or to a nominee for his/her benefit) upon award.
The point of accrual and, therefore, the taxing point may differ depending on the terms (i.e., defer taxation until vesting or bring forward taxation at the time of award).
This decision, thus, clarifies the principles to determine when income in respect of share awards accrues and is to be taxed and further reaffirms the distinction between an outright grant of shares which are forfeitable, and a conditional award of shares subject to vesting conditions.
The case is: Richard Paul Mark Aidan Forlee v. Commissioner of Inland Revenue [2022] HKCA 1098 (22 July 2022) dismissing the Commissioner’s appeal and upholding the decision of the lower court
KPMG observation
The decision affirms certain levels of flexibility available to employers, to influence the timing of tax on share benefits when properly designed and implemented. Employers, therefore, need to consider the taxation principles set out in this decision when designing a new incentive plan and to review the tax position of an existing incentive plan. The terms of the awards may affect the timing of when a taxable benefit arises.
Lastly, it is possible but not certain if the Inland Revenue Department will appeal.
For more information, contact a KPMG tax professional:
David Ling | davidxling@kpmg.com
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