Could a Hong Kong-based voluntary pension scheme be a useful component to your estate plan?

Hong Kong resident employees who intend to retire outside of Hong Kong may obtain significant tax benefits when their employer sets up a HK-based occupational retirement scheme due to unique features of HK’s flexible voluntary pension regime and its double taxation agreements.

Pension Plans under HK’s Occupational Retirement Schemes Ordinance (“ORSO”)

  • This pension scheme is a regulated but flexible compliment to HK’s mandatory (MPF) pension scheme. ORSO plans are typically used for voluntary contributions.
  • Setting up a pension scheme requires a routine application by the employer to the MPF Authority and appointments of a trustee and an investment manager. The scheme is regulated, usually registered with the HK authorities and recognized under FATCA IGAs and CRS Guidance.

An ORSO plan provides the following benefits for an individual planning to retire to or become resident in a number of countries, including the UK.

  • In some plans, the employer is not resident in HK but has employees subject to HK regulations OR that you are not resident in HK but are part of the class of employees entitled to participate in the plan (the trustee’s location in HK is sufficient). However, a legitimate employment arrangement is required and the scheme should have a strong connection to Hong Kong.
  • Your investment portfolio can be held in a segregated account (unlike many off-shore solutions offered to expats) and at any custody bank. It does not need to be held in HK.
  • You choose the investment manager.
  • There are few practical limits on the asset classes into which your pension fund can be invested if an application to “exempt” the scheme is made (although home-country property should be avoided). A diversified portfolio of tradable securities is always permitted.
  • The plan is portable – it is possible to move it to another trustee or asset manager.
  • Contributions to the plan are voluntary. In that case, there are generally no tax deductions at the time of contribution.  However, HK taxes will generally not be applied when such capital and related income is distributed.
  • You may retain control as to when funds are contributed and the contribution amounts – there are no annual or aggregate minimum or maximums. You retain significant flexibility as to when benefits can be taken (although if pension funds from a home jurisdiction are transferred into the scheme, then home country rules likely apply).
  • The plan is a proper trust and therefore, provided minimal planning takes place, the pension fund does not form part of the member’s estate for inheritance tax purposes. For example, it is not subject to IHT-related taxes on contribution and every 10 years {provided offshore assets are contributed while you are not UK resident}, and at death, and are not available to satisfy creditors.
  • When benefits are paid from the pension fund to residents of e.g., the UK, Switzerland or Thailand, those amounts will generally not be subject to income tax in those countries, based on the applicable double taxation agreements.
  • Registered ORSO plans are considered “Non-reporting Financial Institutions” under local guidance for both FATCA and CRS. You should discuss how this may impact reporting of your accounts with your tax advisor.

Issues to consider include:

  • This is a legitimate retirement plan; therefore, to participate you must have an employment agreement with a “sponsoring” employer. Although these pension schemes are also suitable for self-employed individuals who own their own consulting firm;
  • While such a plan may be a useful part of a comprehensive family estate plan, it may not meet all requirements because of its nature as an individual pension plan;
  • Voluntary contributions do not generate any immediate tax benefits (but as a result, there are no contribution limits either);
  • Inserting an ORSO plan to hold your investment account will result in initial modest set-up costs. The incremental annual costs will be trustee fees.  If the plan is registered, then an annual audit is required.

ChapmanCraig Ltd is fully-licensed by HK’s SFC to provide securities advice and asset management services;

  • Craig Chapman and Doug Fletcher are each fully-licensed by the SFC;
  • Doug is a member of the Law Society of British Columbia, has an LL.M. (Tax) degree from NYU, and has the TEP credentials; and
  • We are the investment manager for ORSO pension fund assets for a number of clients.

We are experienced in interacting with trust and tax professionals, wherever located.

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