Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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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. 

Because 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.

Click here to find out what the Board said about compensation.

Severance payment, long-service payment are not taxable.

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: 

  1. Where 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).  

  2. If 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 service”. 

  3. If 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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