Advance Ruling Case No. 25

1. The provisions of the Ordinance

This ruling applies in respect of sections 8 and 9 of the Inland Revenue Ordinance ("IRO").

2. Background

X Company is a member of Group Y. Due to restructuring of group business, X Company is to terminate the employment contracts of all the employees under a redundancy arrangement.

3. The arrangement

In addition to the entitlements as stipulated in the employment contract, Company X is to pay a severance payment to each employee on termination as compensation for the employee’s complete abrogation of his employment contract and loss of certain rights upon the termination of employment. The severance payment is calculated with reference to the length of services of the employee concerned as follows:

Severance payment = Last month salary x No. of years of service

4. The ruling

(a)

The severance payments received by the employees concerned are not chargeable to Salaries Tax under sections 8 and 9 of the IRO.

(b)

For tax reporting purposes, Company X is not required to report the severance payments in the Employer’s Return of Remuneration and Pensions of the employees concerned.

5. The period for which the ruling applies

The ruling applies to the years of assessment 2005/06 and 2006/07.

6. The material assumptions in respect of a future event or any other matter made by the Commissioner

There are no assumptions made by the Commissioner.

7 . Date of ruling issued

27 September 2005.