In the Barneacase, the Supreme Court held that in order to determine the true tax nature ofnon-compete payments, they must be examined in a two-step process:

Step 1: Thecourt must examine whether the payments were made under a genuine non-competeclause, and not as a cover for payments that are not related to the non-competeclause. If the court concludes that the payment was not made under a genuinenon-compete clause, the payments will be taxed in accordance with their truetax nature.

Step 2: Ifthe taxpayer can prove that the payment was made under a genuine non-competeclause, the court must then examine whether it can be proved that the paymentis of a capital nature. At this point, the court holds that there is asignificant rebuttable presumption that a payment made by an employer to anemployee is taxable income under section 2(2) of the Income Tax Ordinance. Theonus is on the employee to rebut this presumption.

It isimportant to note that in the case where the payment for non-compete is notmade to the employee by their employer, but by a third party, then thepresumption that applies to payments made by an employer to an employee doesnot apply. However, it is still necessary to prove that the payment is genuineand of a capital nature.