Skip to main content   Skip to search box   Skip to user groups
User Groups
 

Main Content

Salaries tax is payable on benefits associated with stock-based awards arising from your office or employment in the form of share awards and share options. Here you can learn more about how the benefits of share awards and share options are assessed and how to report these benefits.

Assessability of Share Awards and Share Options

You have to pay salaries tax on any benefits associated with stock-based awards arising from your office or employment.

If you are granted the right to acquire shares within a period of time in the future (i.e. a share option), you will be assessed under section 9(1)(d) of the Inland Revenue Ordinance (IRO) on a notional gain. This is assessed not when the option is granted to you but when you exercise, assign or release that option.

Shares awarded to you not in the form of options may also give rise to a benefit assessable as a perquisite under section 9(1)(a) of the IRO. If so, you will be assessed in the year you are fully entitled to the benefits of the shares.

Both you and your employer must observe the reporting requirements in the returns. Failure to do so may result in heavy penalties. However, any gain or loss you realise from the subsequent sale of the shares is usually non-taxable or non-deductible.

How the Benefits from Share Awards Are Taxed

The granting of share or stock awards constitutes taxable perquisites. The time when the benefit is derived and the value of that benefit for tax purposes are generally determined by the terms governing the awards and the circumstances under which the awards are granted.

If the shares are awarded to you free of charge, the market price of those shares must be included in your assessable income i.e. you will pay tax on $5 if the market price is $5. If you are allowed to buy shares at 80% of the market price and you pay $4 for the shares, you will pay tax on $1. If you are allowed to buy shares at $5 when the market price is $5, there is no benefit and thus no tax implication.

How to Report Share Awards

Employees and directors

  • Benefits derived from share awards must be reported in Part 4.1 of the Tax Return – Individuals (BIR60).

Employers

  • Benefits from share awards must be reported as the employee’s income under

(i)   item 11 (k) on IR56B

(ii)  item 13 (h) on IR56F

(iii) item 11 (h) on IR56G

  •  Examples

Scenario

How to Report

(a) On 1 August 2013, Mr A was granted 2,000 shares of Company X, his employer. On that day the market price was $20 per share. Mr A left Company X on 28 February 2014.

(a)  In the year of assessment 2013/14, Company X should report a share award of $40,000 in item 13(h) of IR56F (i.e. 2,000 shares x $20 per share).

 

(b) Same as scenario (a), but before leaving Company X,  Mr A sold all the shares at the unit price of $25 on 16 February 2014.

 

(b) Company X’s obligation remains the same as for scenario (a).  It should report a share award of $40,000 on IR56F.

Any gain arising from the subsequent sale of the shares (in this case, $5 per share) is not chargeable to tax. Hence, neither the employer nor the employee has to report any gain or loss from the actual sale of the shares.

(c) On 2 October 2013, Ms B bought from her employer, Company X, 1,000 shares of Company Y, at the price of $2 per share. On that day the market price of Company Y’s shares was $5 per share. Company Y is the parent company of Company X.

Ms B is still on her employer’s payroll as at 31 March 2014.

(c) Company X should report a share award of $3,000 [i.e. 1,000 shares x $(5-2)] in item 11(k) of IR56B for the year of assessment 2013/14.

 

 

How the Benefits from Share Options Are Taxed

There are many types of share option schemes. In broad terms, the tax benefit of the share option is the difference between the price paid and the market price at the time of exercise. For example, if you exercise the right to buy shares at $3 when the market price is $5, you pay tax on $2.

For the assignment or release of share options, the tax benefit is usually the actual amount of money that you receive from that assignment or release, less the costs for acquiring the option, if any.

The following four examples explain the basic concept.

Example 1: Exercise of a Share Option for Shares of the Employer

Company X is listed in Hong Kong. On 25 March 2012, it granted Mr C, its marketing manager, the right to acquire 500 shares of Company X at an exercise price of $100 per share within 3 years from 1 May 2012.

Mr C exercised the option on 2 June 2013 to acquire 500 shares. On the exercise day, the market price of the shares was $140 each.

For tax purposes, Mr C has obtained a ‘share option gain’ chargeable to salaries tax by the exercise of the share option. His assessable income for the year of assessment 2013/14 is computed as follows:

 

$

Share option gain $(140 - 100) x 500

20,000

Add: other assessable income, say

600,000

Total assessable income

620,000

Mr C’s employer should report the share option gain of $20,000 in the Employer’s Return.

 

Example 2: Exercise of a Share Option for Shares of an Overseas Company

Company B is an overseas listed company that has a subsidiary, Company C, in Hong Kong. As the accounting manager of Company C, Mr L was granted on 1 September 2012 the right to acquire 10,000 shares of Company B at an exercise price of US$20 per share within 3 years from 1 October 2012.

Mr L exercised his share option to acquire Company B’s shares as follows:

Exercise date

1 December 2012

3 January 2014

Number of shares acquired

5,000

5,000

Exercise price

US$20

US$20

Market price on exercise day

US$30

US$40

Gain realised

(US$30 – US$20) x 5,000

= US$50,000

(US$ 40 – US$20) x 5,000

= US$100,000

Amount of gain that should be reported (in HK$)

US$50,000 x 7.8

 = HK$390,000

US$100,000 x 7.8

= HK$780,000

Year of assessment in which the gain should be reported

2012/13

2013/14

 

Example 3: Assignment of a Share Option

Company X in Example 1 allowed Mr C to assign his share option to his colleagues, and on 20 January 2014 Mr C assigned his option to Ms D for $10,000.

For tax purposes, the amount of share option gain was $10,000 and should be included in Mr C’s assessable income for the year of assessment 2013/14.

 

Example 4: Release of a Share Option

Due to restructuring, Company X in Example 1 became a private company. It paid $35,000 to Mr C on 2 July 2013 for the release of the share option granted to him.

For tax purposes, the amount of share option gain was $35,000 and should be included in Mr C’s assessable income for the year of assessment 2013/14.

How to Report Share Option Gains

Employees and directors

  • Report benefits derived from share options or awards in Part 4.1 of your Tax Return – Individuals (BIR60) for the relevant year of assessment.
  • Report all taxable gains, including the gains connected with former employment.

Employers

The information that must be provided to the Inland Revenue Department is described in the Notes accompanying the Employer’s Return and the relevant items in the IR56 series of forms (IR56B/56E/56F/56G). In summary:

  • the particulars of gains of individual employees and directors should be reported in IR56B/56F/56G for the relevant year for the exercise, assignment or release of the share option;
  • the share option gains of employees and directors who have left employment should also be reported (with a control list attached);
  • for the year when share option is granted, a list should be attached to BIR56A showing names and Hong Kong Identity Card (or passport) numbers of the relevant employees and directors, the number of shares granted and the name of company concerned;
  • for employees and directors who were seconded or assigned to work in Hong Kong and were granted share options carrying conditions prior to their arrival in Hong Kong (and working for a period of time in Hong Kong was amongst those conditions), the employers must complete item 13 of IR56E for each employee and director and submit a list with the following particulars:
    (i)   number and types of shares covered by the option;
    (ii)  consideration, if any, paid for the granting of the option;
    (iii) consideration required to exercise the option;
    (iv) the period within which the option must be exercised; and
  • the relevant employees and directors (including those who have left employment) must be supplied with a copy of the relevant form IR56 to facilitate their reporting.

Reporting share option gains on IR56B/56F/56G

  • Gains realised while in employment

In item 11 (j) of IR56B, the employer must report the share option gain realised from the exercise, assignment or release of share options by employees and directors still in employment.

  • About to cease employment

When an employee or director is about to cease employment (without leaving Hong Kong), the employer should report in item 13 (g) of IR56F any share option gain realised by that employee from the exercise, assignment or release of share options.

  • About to cease employment and leave Hong Kong 

When an employee or director is about to cease employment and leave Hong Kong for any period exceeding 1 month, the employer should report in item 11 (g) of IR56G any share option gain realised by that employee or director from the exercise, assignment or release of share options. If the employee or director has not yet exercised, assigned or released the rights to share options when he leaves Hong Kong, the employer must report that information in item 19 of IR56G, listing:
(i)  the number of shares not yet exercised, and
(ii) the date of the grant.

  • Gain realised by former employees and directors (i) after the termination of employment/office, or (ii) after the termination of employment /office and departure from Hong Kong

The employer should report the share option gain under item 11(j) on IR56B in the year of assessment during which it was realised, submitting a list with the following particulars:
(i)   name of employee or director;
(ii)  Hong Kong Identity Card number (or passport number); and
(iii) the sheet number of the IR56B concerned.

The employer should also pay attention to the following:
(i)   Use of IR56B, not IR56F or 56G.
(ii)  The share option gain realised may be the only item of income to be reported for that year.
(iii)  It is not necessary to furnish IR56B for a former employee or director who has ceased to earn income chargeable to salaries tax and the share option gain realised is equal to or less than the single personal allowance.
(iv)  Although the former employee or director has left employment in a particular year of assessment, the employer may still have to furnish IR56B for subsequent years to report the share option gain.

Other Matters of Concern

Both employers and you as an employee should note the following matters.

  • Employers should each establish a system to pool details of the company’s share award or option schemes and those of its related companies, including companies located overseas.
  • If the shares awarded to an employee are not those of the employer, the tax liability will still be computed in the same way.
  • Both employers and employees should keep records for taxable stock-based awards, so that these can be provided to the Assessor for inspection when required.

Further Information

If clarification about any matters relating to share awards or share options is required, employers can write to the Assessor, quoting their file reference, giving the name of the person responsible for the case and a daytime telephone number for contact.

Further information on the interpretation of employee share option benefits can be obtained on the following link.

Back to top

Last revision date: April 2014

  • Level Double-A conformance, W3C WAI Web Content Accessibility Guidelines 2.0
  • This website is IPv6 enabled
  • Web Accessibility Recognition Scheme
  • Hong Kong ICT Awards 2009 - Best Public Service Application (Website) Silver Award
  • Web Care Award 2011-13 - Ruby Award
  • Web Marketing Association's WebAward 2012 - Standard of Excellence Award
  • Interactive Media Awards 2011 - Best in Class Award (Government)
  • Interactive Media Awards 2012 - Best in Class Award (Government)
End of Page