Hong Kong - Payments in lieu of notice are taxable from year of assessment 2012/13 onwards

Global Watch ()

In the years prior to year of assessment 2012/13, payments in lieu of notice (“PILONs”) made by employers to employees in accordance with the terms of the employment contract or the provisions of the Hong Kong Employment Ordinance (“EO”) were not assessed to Hong Kong salaries tax under the Hong Kong Inland Revenue Department’s (“IRD”) concession. Following the Court of Final Appeal (“CFA”)’s decision in Fuchs, Walter Alfred Heinz v CIR (“the Fuchs case”) and the withdrawal of the appeal to the Court of Appeal by the taxpayers in Mrs. Murad and Others v CIR (“the Murad case”), the IRD follows the legal principles laid down in these cases and revised its assessing practice on PILONs. According to the IRD’s revised position, PILONs which accrue to employees on or after April 1, 2012 (either in accordance with an explicit contract term or as implied under the EO) will be regarded as income from employment and assessed to salaries tax.

This publication discusses the recent development in case law that necessitates the IRD to clarify its position on taxation of PILONs and the implications arising from this change for employers and employees.