Hong Kong ORSO schemes dealt FATCA threat
Hong Kong’s financial institutions have been urged to assess whether their Occupational Retirement Schemes Ordinance (ORSO) retirement schemes are required to comply with the requirements of the US Foreign Account Tax Compliance Act (FATCA), which aims to prevent tax avoidance by US residents, according to law firm Deacons.
ORSO schemes were Hong Kong’s voluntary occupational retirement schemes operated by employers to provide retirement benefits for staff before the implementation of the Mandatory Provident Fund (MPF) system, which introduced the territory’s compulsory retirement schemes.
The Hong Kong and US governments signed an inter-governmental agreement (IGA) in November to facilitate the enforcement of FATCA in Hong Kong. Under the IGA, the city’s financial institutions are required to sign agreements with the US Internal Revenue Service (IRS) to disclose information on their US account holders, unless they are eligible for an exemption. Failure to do so could render the institutions liable to a 30% withholding tax on certain payments received by them.
The FATCA’s exemption is applicable to all MPF schemes due to the low risk of being used as tax evasion, according to law firm Deacons. However, there is uncertainty over the eligibility of ORSO schemes for the exemption, which is subject to a set of conditions.
One of the major criteria requires the ORSO schemes to be established or located in Hong Kong. In addition, no single beneficiary is entitled to more than 5% of the assets in the schemes.
Cynthia Chung, partner at Deacons, told Asia Asset Management that some examples of ineligibility include those ORSO schemes that have moved their domicile from Hong Kong to other jurisdictions such as Bermuda, Cayman Islands and Jersey before the handover of Hong Kong to Chinese rule in 1997. “Over the past year, we helped a lot of clients to move their schemes back to onshore,” she said.
Another cause which makes firms ineligible for an exemption is that the right of individual employees in the ORSO schemes has overshot the 5% threshold as a result of internal promotion of the firm, according to Ms. Chung. In this case, the firms have to adhere to the reporting requirements of FATCA, she added.
Despite the uncertainty over the eligibility of ORSO schemes for FATCA’s exemption, Ms. Chung said there is no prominent trend of financial institutions migrating from ORSO to MPF schemes.
She added that institutions that believe they are eligible for FATCA’s exemption do not need to declare their qualification to US authorities, but should be mindful of any further changes to ORSO schemes. “Employers need to be careful that their schemes may not align with any one of the conditions for exemption in case of any amendments in place. They have to continuously review their schemes on their eligibility of FATCA’s exemption,” Ms. Chung went on.
