Salaries Tax - Payments at the end of an employment
From case law, compensation arises from disputes
between employer and employee, for example: breach of employment contract, deprivation
of employee's lawful rights, or unreasonable dismissal... etc.
compensation is not for services rendered, it is not taxable.
In the case CIR v YUNG TSE KWONG,
90% of the payment on termination of employment was held to be non-taxable
compensation. Click here for details.
to find out what the Board said about compensation.
Severance payment, long-service payment are not
Payment for leave period earned by the employee at the end of
the employment is taxable.
Payment in lieu of notice on early
termination of employment is taxable since 1 April 2012 based on the court
ruling in Fuchs case.
Contracted gratuity paid on maturity of an
employment is taxable. But the taxpayer is entitled to claim spreading the
gratuity over the period of employment up to a maximum of 3 years so that
lower tax rates may apply.
Tax clearance on leaving Hong Kong
Where a taxpayer
claims payment received on termination of employment not taxable
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More on compensation for loss of office:
a lot of employees are made redundant due to downsizing or closure
of certain business activities of the employer, the Revenue will
generally allow the lump sum paid on termination of employments as
compensation for loss of office (not taxable).
the lump sum is already provided in the employment contract to be
paid on termination of employment, the Revenue will assess the lump
sum as “remuneration paid in arrear for the employee's past
the lump sum is paid to induce the employee to start a new
employment, say with an associated company of the employer, the
Revenue will assess the sum as “remuneration paid for future service
of the employee”. See Fuchs case.
To avoid dispute
with Revenue, the lump sum payment should be clearly constructed in the
employment contract as compensation for loss of employment rather than as a terminal
payment for the past services rendered or as an inducement to start a new
employment with an associated company.
More on Long Service Payment and Severance Payment
The long service payment and severance payment paid in accordance with
Employment Ordinance upon termination of an employment are exempt
from Salaries Tax.
Where there is no termination of employment, the above payments
can still be exempt from tax under the Revenue's extra-statutory
concession. This concession applies where the employee's salary is
adjusted downward by way of a dismissal followed by a fresh immediate
re-employment. In such case, if the employer pays the employee a sum
representing the Long Service Payment or Severance Payment, the sum will
be exempt from tax.
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