RICHARD PAUL MARK AIDAN FORLEE v. COMMISSIONER OF INLAND REVENUE

HCIA 1/2019

[2021] HKCFI 2476

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO 1 OF 2019

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J U D G M E N T

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1.  On 24 August 2020, the Court of Appeal granted leave to the Applicant Taxpayer to appeal against the Decision of the Inland Revenue Board of Review (“Board”) of 3 May 2019 (“Decision”). The question of law for determination (“Question”) is:

“Upon the basis of:

(1) the true construction of sections 8(1), 9 and 11B-11D of Part 3 of the Inland Revenue Ordinance (Cap 112), which charge to salaries tax ‘income’ (including ‘perquisites’, such as a gratuitous transfer of shares) ‘accruing to [an employee] … in [a] year of assessment’ ‘from’ any Hong Kong employment ‘when he becomes entitled to claim payment thereof’; when applied to

(2) the facts which have been agreed and/or found by the Board of Review in relation to:

(a) the Taxpayer’s 2002 - 30 June 2014 UK employment, during which (in 2012, 2013 and 27 May 2014) his UK employer awarded EVA Shares to him which (together with all dividends later accruing thereon) became his property, albeit they were subject to compulsory retention periods (the ‘UK Awards’); and

(b) his Hong Kong employment with the UK employer’s Hong Kong subsidiary, from 1 July 2014 onwards, during which the retention periods upon the UK Awards of EVA Shares expired

          - did the Board err in law in concluding that, for the purposes of sections 11B-11D(b), the UK Awards of the EVA Shares only accrued to the Taxpayer upon the expiry of their retention periods during the 2015/16 and 2016/17 years of assessment, so that the UK Awards of the EVA Shares plus the dividends received during those years of assessment constituted chargeable income from the Taxpayer’s Hong Kong employment?”

2.  The relevant sections of the Inland Revenue Ordinance (“Ordinance”) are:

8.   Charge of salaries tax

(1)  Salaries tax shall, subject to the provisions of this Ordinance, be charged for each year of assessment on every person in respect of his income arising in or derived from Hong Kong from the following sources –

(a)  any office or employment of profit; and …..

9.   Definition of income from employment

(1)  Income from any office or employment includes –

(a)  any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance, whether derived from the employer or others, … …

(d)  any gain realized by the exercise of, or by the assignment or release of, a right to acquire shares or stock in a corporation obtained by a person as the holder of an office in or an employee of that or any other corporation.  ….  ….  ….

(4)  For the purposes of subsection (1) - .....

(a)  the gain realized by the exercise at any time of such a right as is referred to in paragraph (d) of that subsection shall be taken to be the difference between the amount which a person might reasonably expect to obtain from a sale in the open market at that time of the shares or stock acquired and the amount or value of the consideration given whether for them or for the grant of the right or for both; …

(5)  Where salaries tax may by virtue of subsection (1)(d) become chargeable in respect of any gain which may be realized by the exercise of a right, salaries tax shall not be chargeable under any other provision of this Ordinance in respect of the receipt of right.

11B.   Ascertainment of assessable income

The assessable income of a person in any year of assessment shall be the aggregate amount of income accruing to him from all sources in that year of assessment.

11C.   Office or employment of profit

For the purpose of section 11B, a person shall be deemed to commence or cease, as the case may be, to derive income from a source whenever and as often as he commences or ceases-

(a)     to hold any office or employment of profit; or …..

11D.   Receipt of income

For the purpose of section 11B –

(a)     income which has accrued to a person during the basis period for a year of assessment but which has not been received by him in such basis period shall not be included in his assessable income for that year of assessment until such time as he shall have received such income, when notwithstanding anything contained in this Ordinance, an additional assessment shall be raised in respect of such income:

Provided that for the purposes of this paragraph income which has either been made available to the person to whom it has accrued or has been dealt with on his behalf or according to his directions shall be deemed to have been received by such person;

… (b)   income accrues to a person when he becomes entitled to claim payment thereof ….

(Emphases added)

3.  The pertinent facts which have been agreed and as found by the Board in the Decision are as follows:

(1)   From 2002 – 30 June 2014, the Taxpayer was employed outside Hong Kong by Investec Bank Plc (‘Plc’) (“UK Employment”). From 1 July 2014 the Taxpayer began his Hong Kong employment with Investec Capital Markets Ltd (“IHK”) (“HK Employment”).  Each of Plc and IHK is a company in the Investec Group (“Group”).

(2)   Investec 1 Ltd, another Group company, operated the Group’s Share Incentive Plan (“Plan”).  The rules of the Plan are set out in a document entitled: ‘Investec 1 Limited – Share Incentive Plan’.  Rule 1.1 of the Plan refers to the “Shares” as shares in Plc – the parent company whose shares are listed on the London Stock Exchange.

(3)   The UK Awards of the EVA Shares were awarded to the Taxpayer on 29 May 2012, 4 June 2013 and 27 May 2014 (“Award Dates”), during the UK Employment of the Taxpayer and before he commenced his HK Employment, with “release dates” being, in respect of each tranche, the expiry date upon the Grantor’s reservation of a contingent entitlement of forfeiture rights set from 29 May 2012 – 27 May 2017 (“Release Dates”).

(4)   The EVA Shares were transferred to and held by the Taxpayer’s nominee, Investec Plc Jersey 1 Trust (“Nominee”), as the agent of the Taxpayer and “on behalf of the Taxpayer for his sole and absolute benefit until the end of the relevant retention period.

(5)   Ever since the Award Dates the Taxpayer had all the rights of a shareholder in respect of the EVA Shares, subject only to the provisions of the Plan.  In particular, he had the right to demand payment of all dividends declared on and the right to vote and direct the nominee how to vote the EVA Shares.

(6)   The Plan restricted the Taxpayer from transferring, assigning or disposing of the EVA Shares (or any rights in the Shares) before the Release Dates.

(7)   Under the Plan, if the Taxpayer ceases to be an employee of the Group before the Release Dates, he would have forfeited the unreleased EVA Shares, and would have no entitlement under the Plan, unless the committee should decide otherwise.

(8)   Upon their release, the EVA Shares ceased to be subject to forfeiture, but the Taxpayer was not able to transfer or dispose of them before the expiry of the Plan’s relevant retention period.

(9)   During the Taxpayer’s UK Employment, the UK Awards of EVA Shares were granted to the Taxpayer by Plc for his performance whilst he was in the employment of Plc in the UK.

(10) The Taxpayer had been assessed upon the basis that, during the 2015/16 and 2016/17 years of assessment (“Years”), he received “Share Benefits” which included: (a) the market value of the UK Awards of EVA Shares on the Release Dates; and (b) the dividends which, during the Years, the Taxpayer received on the EVA Shares (“Dividends”).

(11) Before the Release Date, in respect of forfeitable shares, a person holding the award will have all the rights of a shareholder from the date set for the grant of the award. Where the Taxpayer has not waived his dividend rights, he will receive dividends earned on his forfeitable shares, and where he has not waived his voting rights, he will be entitled to vote, or to direct the Nominee how to vote.

(12) Although the award letters and certificates have not specified the date of the award, it is reasonable to take the release date of the first tranche to be the award date of the related award, and the Board made a finding to that effect.

4.  In respect of each tranche of the relevant EVA Shares, there would be a date of the award of the shares, then a release date, followed by a retention period.  It would only be upon the expiry of the retention period that the Taxpayer would be able to freely dispose of the shares.

5.  The Board referred to the determination of the Deputy Commissioner, at paragraphs 11 to 15 of the Decision:

“11. The Deputy Commissioner considered that the issue he had to decide was whether values of the EVA Shares and their dividends should be chargeable to Salaries Tax; and whether the Share Benefits should be included in the calculation of the value of the residence provided by the employer under the deeming provision in section 9(2) of the Inland Revenue Ordinance.

12. The Deputy Commissioner considered that the values of the EVA Shares and the values of the LTIP Shares (the part attributable to employment in Hong Kong) should be regarded as income derived from his employment with Investec HK in Hong Kong and fully chargeable to Salaries Tax under section 8(1)(a) of the Inland Revenue Ordinance. The Deputy Commissioner reasoned that since the shares previously granted to the Taxpayer were released under the Plan when he was employed by Investec HK in Hong Kong during the years of assessment 2015/16 and 2016/17, and the rules of the Plan and conditions of the grants required the Taxpayer to remain in the employment of the Group before the shares could be released to him, the release of the shares resulted directly from the Taxpayer’s employment in Hong Kong. The Deputy Commissioner also referred to the Employment Contract governing the Taxpayer’s employment in Hong Kong, which provided for the award of shares under the Plan as part of his remuneration.

13. The Deputy Commissioner considered that the values of EVA Shares and the values of LTIP Shares, attributable to the employment in Hong Kong, were perquisites derived by the Taxpayer from Investec HK and that they were income from employment as defined in section 9(1)(a) of the Inland Revenue Ordinance.

14. The Deputy Commissioner rejected the Taxpayer’s objection. The Deputy Commissioner reasoned that the charge of income to Salaries Tax under section 8(1)(a) of the Inland Revenue Ordinance did not depend on whether services were rendered in Hong Kong or other places. According to Investec HK, the relevant EVA Shares were granted after considering the performance factor and for the promotion of ‘good long term behavior’. The shares were not released to the Taxpayer unless he remained in the employment on the released date. Hence the Commissioner reasoned that the shares were released to the Taxpayer because of his employment in Hong Kong.

15. The Deputy Commissioner considered that dividends were perquisites derived from the Taxpayer’s employment in Hong Kong and should be chargeable to Salaries Tax under sections 8(1)(a) and 9(1)(a) of the Inland Revenue Ordinance.  The Deputy Commissioner reasoned that the dividends were paid out of the EVA Shares during the vesting period when the Taxpayer were under the employment with Investec HK in Hong Kong.  Although the shares had not been released, the Taxpayer was paid the dividends as employment benefits under the conditions of grants.  The Taxpayer therefore received the dividends as his employment income and not as investment income.”

6.  The Board’s own determination is contained in paragraphs 42 to 46 of the Decision:

“42. Applying the findings in the preceding paragraph to the EVA Awards, this Board underlines the point that the EVA Shares were held by the nominee on the terms of the Plan and subject to the rules of the Plan until the end of the retention period, albeit they were held by the nominee on behalf of the Taxpayer. It was only on the release date that the EVA shares ceased to be subject to forfeiture and only at the end of the relevant retention period that the respective tranche of the EVA Shares were free of any restrictions under the Plan.

43. This Board therefore considers that those tranches of the EVA Shares that ceased to be subject to forfeiture in the years of assessment 2015/16 and 2016/17 necessarily became so due to the Taxpayer’s continuing employment with the Group in Hong Kong; those Shares became truly the Taxpayer’s as a result of his continuing employment in Hong Kong with a member of the Group. In the relevant retention period there were some restrictions on disposal and transfer but the Revenue conceded that these were of limited scope and duration so as not to affect the vesting on the release date.

44. In the result, this Board rejects the Taxpayer s submission that he was vested with, became entitled to, or otherwise received the value of the EVA Shares before he began his employment in Hong Kong. While the EVA Shares were awarded by deed and it was expressed on the award certificates that the Taxpayer had a right to enforce against the grantor for the EVA Shares, that right, like other rights and obligations relating to the award, must be considered on the terms of the rules of the Plan, Appendices 1 and 2 to the award letters and the award certificates. The EVA Shares only ceased to be forfeitable on the relevant release dates.

45. The Taxpayer relies on s 11D of the Inland Revenue Ordinance. This Board considers that s 11D(a) is not relevant to the issues involved in this Appeal over income said to be received during the basis period for the years of assessment 2015/16 and 2016/17, given that the proviso to s 11D(a) does not apply outside the context of s 11D(a) itself, which concerns income which has accrued to a person during the basis period for a year of assessment but which has not been received by him in such basis period. This Board also considers that none of the two provisos to s 11D(b) applies in this Appeal. This Board lastly considers whether s 11D(b) itself applies and how it applies in the context of this Appeal. This Board finds that since the time at which the shares were no longer subject to forfeiture was the release date (albeit the Taxpayer would only be entitled to insist on a sale at the expiry of the retention period), the time that he became entitled to the value of a tranche of EVA Shares awarded to him was the release date and this was the time when the value of that tranche accrued to him as income for the purpose of s 11B.

46. Turning to the Dividends, they were paid to the Taxpayer during the basis period for the years of assessment 2015/16 and 2016/17.  The Taxpayer was entitled to be paid the Dividends not only because of the relevant award of the EVA Shares but also because the EVA Shares award in question was not forfeited or reduced during the basis period and one of the reasons that was so was that he was in continuing employment in Hong Kong with a member of the Group.”

7.  The present appeal turns on the question of whether the facts found by the Board brought the UK Awards of the EVA Shares (as defined in the Question of law), and the Dividends (as defined in the Decision) received on the said Shares, within the ambit and statutory definition of “income arising in or derived from Hong Kong from the Taxpayer’s employment”, to be chargeable to salaries tax under section 8 of the Ordinance.

8.  In the context of the appeal, Mr Barlow SC has emphasized the point that it would be improper for the Court to review the findings of facts made by the Board (as held by the Court of Appeal in Sandford Yung-tao Yung v CIR [1979] HKLRD 429).  The Question framed in this case is also expressed to be on the basis of those facts found by the Board and as agreed.

9.  The Taxpayer relies on the decision of the CFA in Fuchs v CIR (2011) 14 HKCFAR 74, and the observations of Ribeiro PJ where he stated at para 14:

“Whether a payment received by an employee on termination of his employment is taxable turns on the construction of s 8 (1): Is such payment ‘income … from… any office or employment of profit’? As we have seen, s 9 defines ‘income’ widely to include ‘any wages, salary, leave pay, fee, commission, bonus, gratuity, perquisite, or allowance’. … The key issue is therefore whether those amounts constitute income ‘from’ the taxpayer’s ‘employment’.”

10.  His Lordship then considered and referred to the same issue commonly arising in relation to similar statutory wording in United Kingdom legislation, observing that those relevant charging provisions differ little in substance from our own charge levied on “income from an office or employment of profit”, such that the Hong Kong courts have found helpful guidance in the English jurisprudence when construing s 8 (1) of the Ordinance.  At paragraph 16, Riberio PJ explained:

“The test which has evolved in that jurisprudence for determining whether income is ‘from the taxpayer’s employment’ and therefore assessable rests largely on the three House of Lords decisions just mentioned (ie Hochstrasser (Inspector of Taxes) v Mayes [1960] AC 376, Shilton v Wilmshurst (Inspector of Taxes [1991] AC 684 and Mairs (Inspector of Taxes) v Haughey [1994] 1 AC 303). It is clear that not every payment which an employee receives from his employer is necessarily income ‘from his employment’. It is not sufficient to qualify a payment as such income simply to say that the employee would not have received the sum in question if he had not been an employee. The test, formulated in positive terms as to when the sum is assessable, has been expressed as follows:

‘(a) In Hochstrasser (Inspector of Taxes) v Mayes Lord Radcliffe stated:

The test to be applied is ... contained in the statutory requirement that the payment, if it is to be the subject of assessment, must arise “from” the office or employment. ... I think that their meaning is adequately conveyed by saying that, while it is not sufficient to render a payment assessable that an employee would not have received it unless he had been an employee, it is assessable if it has been paid to him in return for acting as or being an employee.

(b) In the same case, Viscount Simonds approved Upjohn J’s statement in the lower court as follows:

... the authorities show that to be a profit arising from the employment the payment must be made in reference to the services the employee renders by virtue of his office, and it must be something in the nature of a reward for services past, present or future.

(c) In Shilton v Wilmshurst (Inspector of Taxes), Lord Templeman expanded on the test:

Section 181 is not limited to emoluments provided in the course of employment; the section must therefore apply first to an emolument which is paid as a reward for past services and as an inducement to continue to perform services and, secondly, to an emolument which is paid as an inducement to enter into a contract of employment and to perform services in the future. The result is that an emolument “from employment” means an emolument “from being or becoming an employee.” The authorities are consistent with this analysis and are concerned to distinguish in each case between an emolument which is derived “from being or becoming an employee” on the one hand, and an emolument which is attributable to something else on the other hand, for example, to a desire on the part of the provider of the emolument to relieve distress or to provide assistance to a home buyer. If an emolument is not paid as a reward for past services or as an inducement to enter into employment and provide future services but is paid for some other reason, then the emolument is not received “from the employment”.

(d) In Mairs (Inspector of Taxes) v Haughey, while stressing that each case ultimately involves applying the statutory language to the facts, Lord Woolf stated that general assistance is provided by the speeches in the two decisions cited above as to the applicable test.

(e) In the English Court of Appeal in EMI Group Electronics v Coldicott (Inspector of Taxes) after an extensive review of the authorities, Chadwick LJ noted Lord Woolf’s acknowledgment of the guidance provided by Hochstrasser (Inspector of Taxes) v Mayes and Shilton v Wilmshurst (Inspector of Taxes) and applied the test as formulated by Lord Radcliffe and Lord Templeman to conclude that a payment in lieu of notice, contractually agreed from the outset of the employment relationship, fell squarely within it.

17. In my view, the same approach should be adopted in the construction of s.8(1) of the Ordinance. Income chargeable under that section is likewise not confined to income earned in the course of employment but embraces payments made (in Lord Radcliffe’s terms) “in return for acting as or being an employee”, or (in Lord Templeman’s terms) “as a reward for past services or as an inducement to enter into employment and provide future services”. If a payment, viewed as a matter of substance and not merely of form and without being “blinded by some formulae which the parties may have used”, is found to be derived from the taxpayer’s employment in the abovementioned sense, it is assessable. This approach properly gives effect to the language of s.8(1).

18. It is worth emphasising that a payment which one concludes is “for something else” and thus not assessable, must be a payment which does not come within the test. As Lord Templeman pointed out, it is only where “an emolument is not paid as a reward for past services or as an inducement to enter into employment and provide future services but is paid for some other reason, [that] the emolument is not received ‘from the employment’.” (Emphasis supplied) …’

11.  Mr Barlow put emphasis on the case law which highlights that the date when a non-pecuniary perquisite accrues is the date when the recipient became able to “turn it to pecuniary account”.  On behalf of the Taxpayer, it was submitted that it was erroneous for the Board to focus on the fact that the Taxpayer was not able under the conditions of the Plan to transfer, assign or dispose of the Shares before the Release Dates, and that the Shares were liable to be forfeited during that period, such that they only became “vested” in the Taxpayer on the Release Dates (when the Taxpayer was or remained in the employment of I HK).

12.  In Weight v Salmon [1961] the Court considered a director’s “privilege” of applying for unissued shares of the company at their par value, and the shares which he did apply for, and were allotted and received.  It was argued that no profit was received of any kind by the director until the application had been accepted and the shares in question had been allotted, and that it was only then, when he had received the shares upon which there was no “clog”, that he was entitled to go to the market and sell the shares.  Lord Atkin considered that it was “impossible to appreciate such argument”, pointing out that “no question could arise that the person was receiving a profit in the nature of money’s worth”.

13.  In Abbott v Philbin [1961] AC 352, the Privy Council considered an option granted to the taxpayer to purchase shares in a company. The option was expressed to be non-transferable and to expire after 10 years, and the taxpayer was assessed to income tax in respect of the difference between the option price and the market price of the shares when he exercised the option, as being an emolument received by virtue of his employment.  The Court held that the taxpayer should be assessed for the year when the option was granted, since the taxable receipt lay in the acquisition of the option, and it was the monetary value at that date which represented the profit or perquisite of the employment.  Lord Reid held that any conditions and restrictions attached to or inherent in an option may affect its value, but are only relevant on the question whether the option is a perquisite “if they would in law or in practice effectively prevent the holder of the option from doing anything when he gets it which would turn it to pecuniary account”.

14.  Viscount Simonds pointed out in his judgment (at pp 365 and 366 of the report) that when the company granted the option to the taxpayer, he acquired something of potential value, and it does not matter whether it falls into the category of proprietary or contractual right, as “perquisites” are wide and general in meaning, denoting “something acquired which the acquirer becomes possessed of and can dispose of to his advantage- in other words, money - or that which can be turned to ‘pecuniary account’”.  His Lordship considered that an option to take up shares at a certain price was at least a potentially valuable right and something which can be turned to pecuniary account.  Any challenge that the option was not transferable was without substance, and “the fact that there was no realization in the sense of actual turning into money is irrelevant”, since “the test is whether it is something which by its nature is capable of being turned into money”.

15.  Viscount Simonds went on to explain, at p 368, why it is not justified to treat an option as “a thing of no value until it has been exercised”.  He observed that the non-transferability of the option:

“… may reduce the value of the option, (but) cannot alter its character so that it is no longer something which can of its nature be turned to pecuniary account…. It was, in my opinion, a perquisite at the date of grant and, if it had no value, there was nothing to tax and that is the end of the matter.”

16.  Lord Reid also put focus on the nature of the right.  At p 371, His Lordship explained:

“But the test must be the nature of the right and not whether this particular option could readily have been turned to pecuniary account in October 1954. Whether this option could then have been turned to pecuniary account is a question of fact and there is no finding about it. It is true that the option was not transferable, but there are other ways of turning such a right to pecuniary account than assigning it or calling for immediate performance of the obligation to allot the shares. Even taking this particular option I find nothing to indicate that there would have been much difficulty in finding someone who would have paid a substantial sum for an undertaking by the appellant to apply for the shares when supplied with the purchase money and called upon to exercise the option and thereafter to transfer the shares. … No doubt a person who wished to acquire an option on the shares would pay less for an undertaking such as I have indicated that he would pay for an assignable option because of the risks involved, but that only goes to valuation of the right which the appellant acquired.” (Emphasis added)

17.  Lord Reid concluded that if a right can be turned to pecuniary account that in itself is enough to make it a perquisite.  Any conditions and restrictions attached to or inherent in an option may only affect its value.

18.  In Ede v Wilson (1945) 26 TC 381, the Court made it clear that restrictions upon sale of the shares issued were not material to the consideration of whether what was received was an advantage of a nature which can be turned to pecuniary account.  In that case, the directors of a company were allowed to subscribe for shares in a company at their par value, less than the current market value, on the undertaking that they would not sell such shares without the permission of the directors and so long as they remained in the employment of another company.  They were assessed to income tax on the difference between the par value of the shares allotted to them and the market value at the time of the allotment.  The Court held that the privilege granted to the directors represented money’s worth and was assessable to income tax as a profit of their respective offices, but that the amounts of the assessment would have regard to the restriction as to sale.  In his judgment, Wrottesley J observed:

“I think that the Commissioners are wrong in saying that the shares could not be sold. Quite clearly, they could. By consent of the directors they could, and I do not see why I should conclude that that consensus would be unreasonably withheld. Moreover, even without the consent they could be sold, though in that case the seller would expose himself to the displeasure of the board, possibly even to dismissal. I am bound to conclude that, in the hands of the Respondents, the shares may not have the same value as would shares as to which there was no such clog or tie.

… Looking at the substance of the matter, the Respondents have received an advantage which is of such a nature that it can be turned into money.  At the same time, these shares in the hands of these shareholders are doubtless not so valuable for certain purposes as they would be but for the restriction.  Nevertheless, they are a valuable nest-egg, and will doubtless produce a good income in the form of dividend, at any rate, when calculated on the purchase price, that is to say, of course, the purchase price by the recipients.”

19.  The fact of this case is that the EVA Shares were awarded to the Taxpayer by virtue of his services and employment by UK, during the time of his UK Employment.  The EVA Shares were issued, transferred to and held in the name of the Nominee, expressly as the agent of the Taxpayer, on his behalf, and for his sole and absolute benefit until the end of the relevant retention period. The Taxpayer had also been paid, and received, dividends by virtue of the EVA Shares held for him.

20.  On the authorities and the tests set out in the cases referred to above, I cannot see how it can be said that the Taxpayer had not received perquisites which were derived from his employment at the time when the EVA Shares were awarded to him, by Plc, and for his services under the UK Employment.

21.  On behalf of the Board, Counsel submitted that the question turns on s 11B of the Ordinance, as to whether the assessable income “accrued to” the Taxpayer in the relevant year of assessment, and that this “accrual” was at the time when the EVA Shares ceased to be subject to forfeiture and became freely disposable by the Taxpayer (upon the expiry of the Retention Period), and that this was due to the Taxpayer by virtue of his having remained in HK Employment, all in accordance with the terms of the Plan.  It took place in the years of assessment of 2015/2016 and 2016/2017, and so the Taxpayer had to pay tax on these perquisites arising in or derived from his HK Employment.

22.  S 11B is to be read in the light of s 11D, and in particular the proviso to s 11D (a), which states that:

“For the purposes of section 11B – (a) income which has accrued to a person during the basis period for a year of assessment but which has not been received by him in such basis period shall not be included in his assessable income for that year of assessment until such time as he shall have received such income, when notwithstanding anything contained in this Ordinance, an additional assessment shall be raised in respect of such income:

Provided that for the purposes of this paragraph income which has either been made available to the person to whom it has accrued or has been dealt with on his behalf or according to his instructions shall be deemed to have been received by such person;

…

(b) income accrues to a person when he becomes entitled to claim payment thereof”

23.  On the facts found by the Board and agreed, the Taxpayer had received the Dividends in question and these were due and paid to him as a result of his interests in EVA Shares registered in the name of the Nominee, which Nominee held the EVA Shares as agent of the Taxpayer and for his sole and absolute benefit.  The Board had also found that ever since the award dates, the Taxpayer had exercised all the rights of a shareholder in respect of the EVA Shares, including the right to demand payment of dividends declared and the right to vote on the Shares.  In my judgment, the EVA Shares and the dividends had been “made available” to the Taxpayer, or dealt with on his behalf or according to his instructions, within the meaning of the proviso.  As such, for the purposes of s 11B, the relevant income (comprising the EVA Shares and the Dividends) had already accrued to the Taxpayer at the time of the award of the EVA Shares to the Taxpayer and since they were issued to and registered in the name of the Nominee on the Taxpayer’s behalf.  This was before the relevant years of assessment for Hong Kong tax.

24.  The fact that the EVA Shares were not fully transferrable or disposable is not a factor which precludes the accrual of the benefit of the Shares, as the cases of Ede v Wilson, Abbot v Philbin and Weight v Salmon made clear.  From the date the EVA Shares were awarded to him, the Taxpayer “became entitled” to claim (and did claim, and received) the “income” represented by the EVA Shares: and to claim for them to be transferred to the Nominee, to be held for his sole and absolute benefit pursuant to the Plan, and further, to claim payment of any dividends that may be declared on the EVA Shares.  As provided for under s 11D (b), the EVA Shares and dividends accrued to the Taxpayer from the date the Shares were awarded to him, and they could be turned to pecuniary account.  The value of the right and the Shares to which the Taxpayer was entitled at the relevant time is a separate matter.

25.  I accept the submissions of Mr Barlow, that the Board erroneously focused on the issue of the “formal alienability” of the EVA Shares, when the Taxpayer could make an unconditional sale for their full market value following the Taxpayer’s receipt of them.

26.  The cases cited by Counsel for the Respondent do not assist its case.  Tael One Partners Ltd v Morgan Stanley & Co Plc [2015] UKSC 12 concerned the construction of the terms of a particular, non‑standard banking contract.  Even so, Lord Reed’s discussion concerning the general usage of the word “accrue” supports the Taxpayer’s contention, as His Lordship observed:

“The amount to which there is an entitlement may not be payable until a future date, but an entitlement may nevertheless have accrued.”

27.  Director of Public Works v Ho Po Sang [1961] AC 901 concerned land which had been applied for by the lessee, but had not been granted, and the Court held that the lessee holding a rebuilding certificate to pursue renewal of the lease of the land had “no vested right but a mere hope or expectation” of obtaining such rebuilding certificate.  In this case, the EVA Shares had already been applied for, granted, issued to the Nominee for the Taxpayer and benefits thereof received by the Taxpayer.

28.  Attieh v The Commissioner for the South African Revenue Service [2016] ZAGPJHC 371 and Lategan v Commissioner for Inland Revenue 1926 CPD 203 relied upon by the Respondent can also be distinguished from the facts of this case, as the Taxpayer had not only become entitled to the EVA Shares, but had received the rights and benefits of the EVA Shares including the dividends and the right to vote on the shares.  The passages cited from the other authorities relied upon by the Respondent appear to support the Taxpayer’s case on vesting.

29.  The Board’s finding that the Release Dates should be the date when the value accrued to the Taxpayer also seems to recognize and support the irrelevance of the fact that the EVA Shares were not fully transferable.  As Mr Barlow highlighted, on the Release Dates, the EVA Shares could not be sold as the Taxpayer could only dispose of them upon the expiry of the Retention Period.  In fact, the Board conceded (at paragraph 43 of the Decision) that the existence of some restrictions on disposal and transfer during the Retention Period was of limited scope and duration so as not to affect the vesting on the Release Dates.

30.  The Board’s finding was that it was only on the Release Dates that the Shares ceased to be forfeitable under the Plan.  If the Taxpayer ceased to be employed by the Group before the Release Dates, he would have forfeited the unreleased EVA Shares (paragraph 9(13) of the Board’s Decision). Thus, the Board considered that the EVA Shares only “became truly the Taxpayer’s as a result of his continuing employment in Hong Kong with a number of the Group” (paragraph 43 of the Decision).

31.  Mr Barlow argued that the Board’s erroneous focus was on the time when the Taxpayer acquired legal title in the EVA Shares.

32.  In my judgment, the fact that the EVA Shares, or the Taxpayer’s right or claim thereto, could be forfeited under the terms of the Plan do not affect the accrual of the right or the “income”.  “Forfeiture” is the loss or deprivation of an interest in property.  Under the Plan, what could be forfeited was the right or interest of the Taxpayer in the EVA Shares. “Forfeiture” does not preclude “vesting”.  In theory, there can be no forfeiture without a prior vesting of the interest to be forfeited.  The EVA Shares can be vested in the Taxpayer, despite the fact that they may be “clogged” in the sense of being liable to forfeiture.  I agree that in its determination of when the EVA Shares had vested or become the Taxpayer’s, the Board had placed erroneous focus on the fact that the EVA Shares were liable to be forfeited.

33.  The Board’s reliance on the fact that the EVA Shares only became “truly” the Taxpayer’s, as a result of his continuing employment in Hong Kong with I HK, was unwarranted in all the circumstances and on the proper construction of the relevant charging sections of the Ordinance.  As Mr Barlow pointed out, it is wrong to simply apply a “but for” test, and by doing so, the Board lost sight of the observation made by Ribeiro PJ in Fuchs v CIR: the fact that the taxpayer would not have received the relevant payment if he had not been an employee is not sufficient to render the payment chargeable income from employment in Hong Kong.  In His Lordship’s exact words:

“It is clear that not every payment which an employee receives from his employer is necessarily income ‘from his employment’. It is not sufficient to qualify a payment as such income simply to say that the employee would not have received the sum in question if he had not been an employee.”

34.  It is true that under the terms of the Plan, the Taxpayer’s rights to and interests in the EVA Shares could be forfeited, but the nature of the perquisite and the rights enjoyed by the Taxpayer have to be considered in deciding when the EVA Shares accrued to the Taxpayer.  In this case, the EVA Shares were clearly awarded to him by virtue of, and were derived from, his UK Employment, and the EVA Shares had been made available to the Taxpayer, or dealt with by him or on his behalf, before the Release Dates relied upon by the Board.

35.  As for the Dividends, the Deputy Commissioner had considered that they were perquisites derived from the Taxpayer’s employment in Hong Kong and were chargeable under ss 8 and 9 of the Ordinance.  The Board decided that the Dividends were received by the Taxpayer by virtue of the fact that the EVA Shares were not forfeited, and that one of the reasons was that the Taxpayer was in continuing employment in Hong Kong with I HK.

36.  I accept the submissions of Mr Barlow, that the Dividends were received by the Taxpayer as a result of his receipt of the EVA Shares awarded to him by virtue of his UK Employment.  The Dividends were due to the Taxpayer under the terms of the Plan, and by virtue of the fact that the Nominee was registered as the holder of the EVA Shares, on behalf of, as agent and for the sole benefit of the Taxpayer.  The source of the Dividends was the contract between Plc and its shareholder, the Nominee as agent for the Taxpayer.

37.  Mr Barlow highlighted the fact that the Ordinance does not impose any tax on dividends received from Hong Kong companies, and in this case the dividends received by the Taxpayer were declared by an offshore company, Plc. It would be double taxation to tax both the receipt of the EVA Shares and the Dividends which later accrued to the Taxpayer upon the shares.  I agree that these do go against our basic and general taxation principles.

38.  For all the above reasons, I allow the Taxpayer’s appeal and annul the two assessments made by the Board at paragraph 51 of the Decision. It follows that the Taxpayer is to have the costs of the appeal, with certificate for counsel, and an order nisi is made to that effect.