Further to our article entitled Updates on impact of FATCA  final regulations on ORSO/MPF Schemes in Hong Kong in our June newsletter (Issue 3 of 2013), on 13 November 2014, Hong Kong and the US have formally signed a Model  2 intergovernmental agreement (“IGA”) that will facilitate compliance with the US Foreign Account Tax Compliance Act (the “FATCA”) and cover exemptions from FATCA compliance by the financial institutions in Hong Kong.

In brief, FATCA is aimed at combating tax evasion by US taxpayers using offshore financial accounts. Under FATCA, foreign financial institutions (“FFIs”) are required to report  to the US Internal Revenue Service (“IRS”) financial account information of US taxpayers. Failing this, the FFIs would face a 30% withholding tax on their US-sourced income. Under the IGA, the first reporting will take place in March 2015. As the definition of FFIs is very broad, it could cover retirement schemes such as ORSO schemes and MPF schemes in Hong Kong.

Under the IGA, FFIs in Hong Kong will need to register with the IRS as Participating FFIs and sign FFI agreements. The FFI agreements require the FFIs to seek consent of their US clients for reporting their account information to IRS. If the US clients refuse to give consent, FFI should report “aggregate information” of account balances, payment amounts and number of non-consenting US accounts to the IRS. The IRS may lodge requests to the Inland Revenue Department for exchange of information on a group basis pursuant to the tax information exchange agreement signed between Hong Kong and the US on 25 March 2014.

Unless the FFIs are exempt under the IGA, the FFIs must comply with FATCA even if they do not actually have any US account holders. However, in view of the low risks of being used as tax evasion, all MPF schemes and certain retirement funds that qualify as “exempt beneficial owner” under  Annex II of the IGA are exempt from the FATCA requirements.

One class of retirement funds which can be exempted is a broad participation retirement fund that meets specific criteria. A broad participation retirement fund is a fund that (1) has been established or located in the HKSAR to provide retirement, disability, or death benefits to beneficiaries that are current or former employees of one or more HKSAR employer in consideration for services rendered; (2) does not have a single beneficiary with a right to more than 5% of the fund’s assets; (3) is subject to government regulation in the HKSAR as a retirement scheme; and (4) a pension scheme is established voluntarily by a HKSAR employer  and is approved or registered by the MPFA. In addition, the fund must satisfy one of the following requirements:  (a) be generally tax-exempt on investment income under HKSAR laws; (b) receives at least 50% of its total contributions from the participating/ sponsoring employers; (c) distributions or withdrawals from the fund are allowed only upon the occurrence of specified events related to retirement, disability, or death, or penalties apply to distributions or withdrawals made before such specified events; or (d) contributions by employees to the fund are limited by reference to earned income of the employees or may not exceed US$ 50,000 annually.

Another class of retirement funds which can be exempted is a narrow participation retirement fund. In addition to satisfying criteria (1), (3) and (4) above, a narrow participation retirement fund must have fewer than 50 participants and be sponsored by employer(s) that are not Investment Entities or Passive NFFE (as these terms are defined in the IGA). Further, the participants that are not residents of the HKSAR are not entitled to more than 20% of the fund’s assets.

As there are different types of ORSO Schemes, ORSO scheme administrators should work with the relevant employers to consider whether their ORSO scheme can be qualified as an “exempt beneficial owner”. If the scheme cannot be so qualified, the scheme should ensure FATCA compliance including timely registration with the IRS, due diligence, reporting, review of the data systems and procedures on data collection etc.