What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) is an invasive piece of US legislation. It is designed to identify tax avoidance being undertaken by US entities. It does this by imposing a 30 percent withholding tax on any US investments unless certain information is disclosed to the US tax authorities.

Why does this impact ORSO schemes?

The primary responsibility for compliance with FATCA is placed on foreign financial institutions (FFIs). ORSO retirement schemes will, typically, be FFIs.

As such Hong Kong ORSO schemes which have investments in the US may find themselves hit with the withholding tax unless they comply fully with FATCA (which means providing considerable data to the US Internal Revenue Service) or they are able to fall into one of the categories of "exempt beneficial owner" in the agreement which is being discussed between the Hong Kong Administration and the United States Government. Such agreement is called an Inter-Governmental Agreement (IGA).

The Mandatory Provident Fund Schemes Authority last week circulated a document describing the anticipated conditions for an ORSO scheme to be considered an "exempt beneficial owner" under the proposed Hong Kong IGA. Such document is not yet signed (and so is capable of being changed) but it is unlikely that further change will be made.

What schemes will be considered "exempt beneficial owners" under the Hong Kong IGA?

The IGA contains two categories of "exempt beneficial owner" that could apply for ORSO schemes. These are Broad Participation Retirement Funds and Narrow Participation Retirement Funds.

Different conditions apply for satisfying the two different categories (see quick checklist). However, there are also four conditions that are common to both Broad and Narrow Participation Funds. These common requirements are as follows:

  • The ORSO scheme must be "established or located" in the HKSAR
  • To provide "retirement, disability or death benefits"
  • To current or former employees of one or more "HKSAR employers", and
  • The ORSO scheme must be "approved and registered by the Mandatory Provident Fund Schemes Authority"

These requirements are considered further below.

What is the meaning of "established or located" in the HKSAR?

Frustratingly this provision of the IGA has been amended in the final draft of the document. The former draft required the retirement scheme to be "established, located or domiciled [emphasis added] in the HKSAR". The term "domicile" is a phrase with which most Hong Kong trustees will be familiar as it is defined in ORSO to mean the governing law of the trust. However, the final draft has removed this term and left us simply with "established" or "located", neither of which are defined terms.

ORSO schemes can be established under Hong Kong law or the law of some other jurisdiction. They can have a Hong Kong trustee or a trustee set up in some other country. They can be administered in Hong Kong or elsewhere. As such, the question of whether a scheme is "established or located" in Hong Kong may be a simple question for many schemes, it may be considerably more complex for others.

What is the meaning of "retirement, disability or death benefits"?

Most, if not all, Hong Kong ORSO schemes will satisfy this requirement.

One slight weirdness is that for a Broad Participation Retirement Fund these words are qualified by the phrase "or any combination thereof", whilst such qualification does not exist for a Narrow Participation Retirement Fund.

We suggest this is a mistake and is not intended to be a material difference.

What is a "HKSAR employer"?

One interpretation would be that a HKSAR employer is a person who employs any employee who is covered by the Employment Ordinance. If so then this would be a usefully wide definition.

What is the meaning of "approved and registered" by the MPFSA?

ORSO schemes do not get "approved" by the MPFSA. They can, however, get "registered" by the MPFSA under ORSO.

Our understanding is that an ORSO registered scheme will be considered "approved and registered by the MPFA", whilst an ORSO exempt scheme will not.

What next?

Employers and trustees need to consider whether their ORSO schemes can satisfy one of the requirements as an exempt beneficial owner. If this is not possible then the scheme may need to comply fully with the FATCA disclosure requirements or accept a 30 percent withholding tax on investment income from the US.