A taxpayer who holds an office in a corporation or as an employee may receive any share award/share option benefit from the corporation (employer), and these gains are also included as assessable income under the Inland Revenue Ordinance. Shares received by an employee are shares that can be distributed by his employer without paying any consideration. These gains are the share award benefits under section 9(1)(a) of the Inland Revenue Ordinance, which are chargeable to salaries tax additional reward.
Employers may also receive shares from employees who are below market value and give stock as a gift. The difference benefit is the total stock amount at market value minus the total stock amount given to employees below market value. Either the differential benefit or the total stock value without consideration is part of the employee’s income.
The right to subscribe for shares granted by the employer because of serving or being employed by an employee is an additional reward and is subject to salaries tax. There are several situations in which the share subscription right can be obtained:
• Employees can exercise the right to subscribe for shares, and the subscribed shares can be in Hong Kong or non-Hong Kong companies. When an employee subscribes for a stock at a price below the market value, the market value minus the option price is the difference to be taxed. This tax difference is calculated in accordance with the formula referred to in Section 9(1)(d) of the Inland Revenue Ordinance and is taxable in the year of assessment in which the share option is exercised, transferred, or waived.
• With the permission of the employer, the employee can transfer the gifted share options to other colleagues, and the colleagues will pay him a sum of money for the share options, which is subject to salaries tax.
• The employee may not be able to exercise the share subscription right due to the company reorganization of the employer. The employer will take back the share subscription right originally granted to the employee and give the employee a sum of money, which is also subject to salaries tax.
It is mentioned here that the employer must report the share award/share option benefit granted to the employee truthfully in the employer’s remuneration and pension tax return, and the employee must report it in the individual tax return. In addition, when the employee sells the relevant shares in the future, the profits earned are generally not subject to salaries tax, and any losses are not tax deductible.
The above information is for reference only. If in doubt, we welcome your tax enquiry