Moving to Hong Kong? Know your retirement schemes (Part 3)

by Sanjna Melwani, international assignment (tax) expert in Articles

DatePosted on January 12, 2016 at 10:12 PM
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Prior to the implementation of the Mandatory Provident Fund (“MPF”) Ordinance (around the year 2000), employers were able to set up the voluntary Occupational Retirement Schemes (“ORSO”) for employees which were regulated under the Occupational Retirement Schemes Ordinance.  As these were not mandatory, contribution amounts, investment choices and vesting schedules could be drawn up by the employer so long as they followed the rules set out in the ordinance.  

After the implementation of MPF schemes in Hong Kong SAR, most employers switched to MPFs although those who operated ORSOs were able to apply for exemption, i.e. to continue operating as a scheme.  The condition to continue was that a parallel MPF also be set up so that employees could be given free choice between the two schemes. 

Key differences - MPF and ORSO schemes
  MPF if mandatory ORSO is voluntary
Income definition Income is defined Income is determined by employer
Contributions Contributions by employers and employees are usually 5% of relevant income subject to cap currently at HKD30,000 (additional voluntary contributions may be made but tax deductibility of these may be limited) Subject to scheme rules and some employers do not require employees to make contributions
Investments Employee may choose Employer usually chooses
Vesting Benefits are immediately vested in the employee but receivable only on attaining age 65 or upon other conditions such as permanent departure from Hong Kong (one time only)  There may be a vesting schedule based on completed years of service
Withdrawal At age 65 Upon termination of employment*
Recourse Compensation fund available for employees where misfeasance has taken place  Usually no compensation available
Account status Employee can check directly Usually employee has to check with employer


* If an employee joined an ORSO scheme after 1 December 2000, upon termination of employment, first the employee will have to transfer an amount as if they had been under MPF (known as 'Minimum MPF Benefits' — or MMB for short) to a preserved MPF account of the employee’s choosing. These sums could only be withdrawn when the employee reaches age 65 or fulfills the early withdrawal criteria.  Any excess funds may be withdrawn.

The calculation of MMB is prescribed under the Mandatory Provident Funds Schemes Ordinance as the lower of:

a) the member’s benefits accrued and held under the scheme during the period when the exemption certificate applied to the scheme; or

b) 1.2 × final average monthly relevant income × years of post-MPF service

Further Key Features of MPF

Since the MPF is the most common scheme in Hong Kong SAR, some key points are outlined below:

1. Current Contribution Amounts:

  Mandatory contribution requirements
Monthly income (relevant income) Employee Employer
Less than HKD7,100 No contribution required 5% x relevant income
HKD7,100 to HKD30,000 5% x relevant income (note 1) 5% x relevant income (note 1)
Exceeding HKD30,000 HKD1,500 (note 2) HKD1,500 (note 2)


Note 1: Employee has a 'contribution holiday' at commencement of employment subject to certain rules but should be around first 30 days of employment and any incomplete month (there are more specific rules and this is simply a general guidance).  HR of employer will give exact guidance based on commencement of employment date.   Employers must contribute from first date of employment.  Contributions should be made by the contribution date (usually 10th of each month).  The employee’s contributions will be taken from their payroll to deposit to the MPF provider trustee account while the employer’s contributions will be directly deposited to the MPF provider trustee account. 

Note 2: Although HKD1,500 is the cap, additional voluntary contributions may be made.  For an employee, the maximum tax deductible amount is HKD1,500 X 12 = HKD18,000 in a fiscal year of assessment.  For employee tax purposes, the employer will report gross income.  The employee will then be allowed to claim up to the cap amounts of MPF paid in the fiscal year as a deduction on his or her tax return (currently, maximum HKD18,000).  Additional voluntary contributions will not be tax deductible.  Employers can claim tax deductions for mandatory and voluntary contributions made for their employees (to the extent that they do not exceed 15% of the employee’s total emoluments).

2.  Additional employer contributions

Should additional voluntary contributions have been made by the employer, if the employee’s service was less than 10 years, the employer will have to report to the accrued benefits for tax purposes as outlined by the Mandatory Provident Funds Schemes Ordinance.

3. Some persons can be exempt from MPF scheme

Under certain conditions, the exemptions may apply, such as being on ORSO, the employee being in Hong Kong for not more than 13 months, remaining under an overseas retirement scheme, those who are employed for less than 60 days, etc.

4. Self-employed persons

Self-employed persons should also make contributions if the monthly income limits are exceeded and with the same cap.

5. Early withdrawal may be possible in certain circumstances.

Examples include early retirement (at least age 60), permanent departure from Hong Kong (this reason can only be used once in a lifetime), total incapacity, terminal illness, death (payable to scheme member’s personal representative or the Official Administrator) and small balance (not more than HKD5,000 among other conditions).  No other circumstances will be entertained.

Final Comment Related to US Tax Reporting

Employer’s contributions to MPF are reportable as income for US tax reporting purposes.  For ORSO, reportable income is usually based on vesting schedules.  Value held in MPF or ORSO account may also be required to be reported for FBAR purposes. 

 

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Also in this series:  
Tax Series Part 2, Hong Kong International Assignment (Territorial Concept)
Tax Series Part 3 Hong Kong International Assignment (Retirement: Mandatory Provident Fund vs ORSO) — see above
Tax Series Part 4 Hong Kong International Assignment (Housing Benefit)
Tax Series Part 5 Hong Kong International Assignment (American 1040 Filing)
Tax Series Part 6 Hong Kong International Assignment (American FATCA and Form 8938 Reporting)
Tax Series Part 7 Hong Kong International Assignment (US Estate Tax Implications – Americans and non-American Investors)
Tax Series Part 8 Hong Kong International Assignment (Departure from Hong Kong)
About the Author

Sanjna Melwani, international assignment (tax) expert

After graduating from The Hong Kong Polytechnic, Sanjna commenced her international accounting career with Arthur Andersen, where she qualified for her ACCA. There then followed a tenure as an international tax advisor to globe-trotting Executives in the International Assignment Services (IAS) division of PricewaterhouseCoopers.  She has had a successful career which also covers expense management and HR advisory.

Sanjna now runs her own tax consultancy, Apex Tax Advisory, helping US citizens with their tax matters whilst working abroad, and assisting returnees to the United States.  She is based in Hong Kong.  

If you're an US executive looking to move to Hong Kong (or indeed already living in Hong Kong) and in need of understanding your tax affairs, you can contact Sanjna by email: sanjna@apex-tax.com

Sanjna Melwani, Director
Apex Tax Advisory Limited
E-mail: sanjna@apex-tax.com

Telephone: +852 5617 6573

Address: Room 2207-9, Tower Two, Lippo Centre,
89 Queensway, Admiralty, Hong Kong
www.apex-tax.com

Note: the views and beliefs expressed by our independent contributors are of their own and do not necessarily represent the views of Star Anise.  All tax matters of an individual are unique to that individual, and tax advice should be tailored to suit that individual's needs. 

 

 

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