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It is a common practice to offer a redundancy package for employees when an employer downsizes its headcount. The common elements of the package would include long term service payment, severance payment, payment in lieu, gratuity, etc.
If the termination payment is made for past, present or future services, it would be taxable for salaries tax purposes. However, if the documents and surrounding circumstances show that the payment is:
the payment would be considered as a non-taxable payment.
A Board of Review Case (D71/06) ruled in favour of the taxpayer and concluded that termination payment made in consideration of the abandonment of all contractual rights under the services agreement was not taxable.
The Inland Revenue Department accepts that a payment made as compensation for the loss of employment or for the settlement of a claim for damages for wrongful dismissal is not assessable for salaries tax purposes. The Inland Revenue would carefully look at the circumstance in which the compensation is made and the documentation before granting such concession. If the payment is in fact a contractual payment or is related to past, present and future services, the payment would be specifically chargeable for salaries tax.
The Inland Revenue Department generally exempts the long term service payment and severance payment if such payments are paid in accordance with the Employment Ordinance. If the payments are made in excess of the statutory requirements under the Employment Ordinance, the Inland Revenue would consider the excess amount as assessable income. Moreover, it is possible to withdraw the employer's contributions from the MPF to fund the long term service payment and severance payment.
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