The gain realized on exercising or selling the share options granted by the employer is taxable.
The gain taxable on exercising the options is the market value as at the date of the exercise less the price paid by the employee. Any gain or loss on sale of the shares after the exercise is ignored. So, if you don’t want to take the risk of fall in market value after you get the shares, sell them quickly.
The gain taxable on selling the options is the net sales proceeds less the price paid by the employee for the options. If you don’t sell the options, they won’t be taxed.
Remark: If the services, for which the share options are granted, are exempt from tax, then the related gain will be exempt too. At times, the exemption is computed by time apportionment.
The taxability of the share options is irrespective of: (a) Who issues the share options, or (b) Where the shares option are issued, or (c) Whether the shares acquired by exercising the options are unsold and held by the employee as capital investment. The crucial questions are: (i) whether the share options are granted in respect of taxable services in Hong Kong and (ii) whether they are exercised or sold.
Share option is the right to acquire shares at a prescribed price. It is different form the share issued to employee at a discount. Share options are not taxable until it is exercised or sold by the employee, but shares issued at a discount are taxable at the time of issue. If the shares issued are subject to a restriction, say a holding period of 2 years, then the taxpayer can ask for a discount when computing the taxable value.
The Revenue’s assessing practice on share options is set out in Departmental Interpretation and Practice Note No. 38. To read it, click here to IRD’s homepage > English > Publications > Departmental interpretation and Practice Note.