In November 2019, the Court of Final Appeal (CFA) upheld the decision of the Court of Appeal, dismissing the IRD’s appeal and upholding the taxpayer’s conclusion that the bonus and share option gains arising from the termination of employment agreements are not subject to salaries tax.


Poon Cho-Ming, John v Commissioner of Inland Revenue FACV 1/2019 [2019] HKCFA 38

The taxpayer was employed in Hong Kong since October 1999 and in July 2008, the company notified the taxpayer that his position as Group Chief Financial Officer and Executive Director of a listed company was terminated with immediate effect. The taxpayer was unwilling to accept the termination and indicated that he would take legal action against his employer and inform the company’s shareholders. After negotiations between the parties, the terms of the termination were finally agreed on July 20, 2008.

According to the agreement, the taxpayer received several sums of money:-

1.Payments in lieu of notice;

2.statutory long service payments; lieu of pay for untaken annual leave

4.bonuses in lieu of annual leave; and

5.payments in consideration of contracts made by the taxpayer.

In addition to the above, the agreement allows the taxpayer to exercise the options granted to him during the course of his employment. The employer advanced the vesting date of the options to the termination date specified in the separation agreement and the taxpayer exercised the options on time.

The IRD assessed the above amount for salaries tax, but the taxpayer challenged the IRD’s approach.

Both the Board of Review and the Court of First Instance decided in favor of IRD, which was subsequently overturned by the Court of Appeal, and decided in favor of the taxpayer, i.e., the bonuses in lieu and the gain on the share options were not subject to salaries tax. The IRD appealed the Court of Appeal’s decision to the Court of Final Appeal.


Among the above amounts, the bonus in lieu and the share option gain are the two items in dispute between the Board of Review and the Court. As far as salaries tax is concerned, the treatment of compensation for termination of employment is not specifically provided for in the IRO.

The Court of Final Appeal Decision

The Court of Final Appeal (“CFA”) ruled in 2019 that the Court of Appeal was correct in holding that the bonuses in lieu of and gains on share options in this case were not taxable.

In reaching its decision, the CFA adopted the principle established in Fuchs v Commissioner of Inland Revenue (2011) that awards and/or payments of awards for past, present or future service are treated as employment income subject to salaries tax under section 8(1) of the IRO. In contrast, payments made for “other things” are not subject to salaries tax.

For bonuses in lieu of bonuses, the IRS considers the payment to be a recognition of the taxpayer’s efforts and therefore subject to salaries tax. The IRD also applied the “substitution test” referred to in Mairs v Haughey (1994), i.e. if an amount is an exact substitute for another amount, the amount also has the nature of the latter. However, the Court of Final Appeal referred to the decision of the Court of Appeal and held that there was no evidence that the performance of the employer and the performance of the employee had been used to determine the bonus paid to him. Moreover, the bonus review process had not yet begun when the taxpayer’s services were terminated. Therefore, the amount of the bonus in lieu of payment was arbitrary and of a different nature; it was simply a payment to the taxpayer to leave the company.

With respect to the gain on the option, the IRS emphasized that the option was originally granted during the taxpayer’s employment and therefore derived in large part from services rendered during his employment. However, the Court of Final Appeal agreed with the Court of Appeal that the gain on the accelerated grant of stock options was not a reward for the taxpayer’s past or future services to the company, but merely to allow him to leave the company. The taxpayer was also not entitled to receive shares upon termination of employment if the employer did not advance the vesting date of the options.

The CFA therefore ruled that the taxpayer was not receiving payments in recognition of past, present or future services, i.e., not income from employment. The bonus and share option gains arising from the separation agreement in this case were not subject to salaries tax.


The taxability of an amount can only be determined by the basic salaries tax principles established in the transitory cases, taking into account the specific circumstances of each case. The decision of the Court of Final Appeal in this case affirms the principle that payments made as an employee or in return for an employee are taxable, while payments made “for other things” are not taxable.

However, differing views and extensive case law on the taxation of severance payments show that applying these principles is often difficult and there is often a fine line between taxation and non-taxation. If you have any questions, please consult with a tax or legal professional.

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