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Advance Ruling Case No. 22

1. The provisions of the Ordinance

  This ruling applies in respect of sections 8 and 9(1) of the Inland Revenue Ordinance ("IRO").

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2. Background

(a) X Company is a company incorporated in country A with its shares being listed in the stock market of country A.
(b) X Company is proposing to launch a stock purchase plan to the employees employed by entities within the X Company group.
(c) The stock purchase plan consists of two offers, a Basic Offer and a Multiple Offer.

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3. The arrangement 

  Basic Offer
(a) The employees may subscribe the shares at a 20% discount of a reference price fixed by the company.
(b) The shares subscribed are registered in the name of the employees. The employees will have the same rights as other shareholders, including the right to receive dividends.
(c) The allocated shares are subject to a 5-year Lock-Up Period, during which the employee is not allowed to sell the shares except under certain predetermined conditions.
  Multiple Offer
(a) Under this offer, the subscription price is also fixed at a 20% discount of a reference price.
(b) The rights and restrictions attached to the shares allocated to an employee under the Multiple Offer are identical to those under the Basic Offer.
(c) Additionally, the employees are allocated a Right for each subscribed share.
(d) At the end of the 5-year Lock-Up period, a Right will entitle the employee to a payment equal to a predetermined multiple of the average share price increase above the reference price.

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4. The ruling

  Basic Offer
(a) Taxable income arises under sections 8 and 9(1) of the IRO on the date when the shares are allocated to the employees.
(b) The amount of taxable income is -

No. of shares allocated x [ Discounted Market Value - Subscription Price ]
  • Discounted Market Value = [Market value of 1 Share as at the date of allocation] x [1 - 25%]
  • Subscription Price = [Reference Price] x [1 - 20%]
  Multiple Offer
(a) The tax treatment of the shares allocated to the employees is the same as that of the shares allocated under the Basic Offer.
(b) The payment received from the Right is taxable income accrued to the employees when they receive it.

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5. The period for which the ruling applies

  The ruling applies as from the year of assessment 2005/2006 but subject to legislative changes, if any, in the future.


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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.

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7 . Date of ruling issued 

  17 June 2005.