Hong Kong has long attracted the best and the brightest to work in one of the world’s leading international financial centre, and one which also happens to be a Special Administrative Region (SAR) of China, the world’s fastest-growing major economy. But while Hong Kong has always been forward thinking in its approach to capital, it has generally been less dynamic in its approach to human capital.
That is now changing. The traditional ‘base plus bonus’ formula for remuneration in Hong Kong is increasingly being supplanted by more progressive packages that include occupational pension schemes and employee benefit trusts to assist employers in Hong Kong to attract, retain and reward key talent in the face of ever greater international competition.
Occupational pension schemes
Hong Kong joined major economies like the UK, Australia and the US in mandating that employees and employers should contribute to a retirement benefit scheme on behalf of their staff. The Mandatory Provident Fund (MPF) system was launched in December 2000 to complement the existing voluntary Occupational Retirement Schemes Ordinance (ORSO).
As a result, employees are required to fund their pension with 5% of their monthly salary subject to a maximum of HK$ 1,500, with the employer matching their contribution. The individual can claim full tax relief against salaries tax on their MPF contributions up to a maximum of HK$ 18,000 per annum. Any additional contributions to a Hong Kong pension (whether MPF or ORSO) do not give rise to greater salaries tax relief. However,
This is not the case for employers making contributions on behalf of their staff. Hong Kong companies are subject to profits tax at a rate of 8.25% on the first HK$ 2 million of profit and 16.5% on any further profit. Contributions into pension schemes on behalf of a company’s staff members get full tax relief against corporate profits tax, subject to a maximum of 15% of each of those individuals total annual remuneration.
For example where an individual is earning HK$ 1 million per year, a maximum of an additional HK$ 150,000 can be settled upon the pension scheme. That HK$ 150,000 is a business expense that comes off the company’s’ accounts, with an additional HK$ 150,000 of the retained profit amount being ring-fenced from the profits tax.
The benefits paid by a pension scheme will be subject to tax in Hong Kong tax if the beneficiary is resident in Hong Kong but, if the beneficiary is resident overseas, benefits may be subject to relief under Double Taxation Agreements (DTAs). Hong Kong currently has DTAs in force with Belgium, Canada, Czech Republic, France, Hungary, Indonesia, Ireland, South Korea, Netherlands, Romania, Russia, Switzerland and the UK, which means that the income from a Hong Kong-sited pension will only be taxable in Hong Kong.
Employee benefit trusts
Whilst an occupational pension scheme requires the company to apply additional funding to the individuals’ remuneration, some companies wish to incentivise and reward employees through types of share option plans. By aligning the interests of employees with those of the shareholders, the intention is to encourage loyalty and commitment on the part of the employees and a desire to see the company perform well. Companies benefit from dedicated and motivated employees who in turn may expect greater reward from the successes of their employer.
Using the company’s shares as an incentive means that there is no need for an instant cash settlement and, in future years, settlements can typically made from surplus profits. Where an employer wishes to use its shares, with or without an additional cash settlement, they can create an employee benefit trust (EBT).
Under an EBT arrangement, an employee is typically required to remain as an employee of the company for a prescribed period of time before the benefits vest with them. At this point, they can either hold the shares and receive any dividends that are paid, or they can sell the shares back to the company for a prescribed sum.
Not all EBTs hold shares in the company as an asset. A common variant involves bonus payments earned by employees. Instead of being paid directly to the employee, these can be deferred and settled on the EBT to vest as and when the employee has completed a prescribed period of continuous employment with the company.
The advantages of using an EBT are that assets held in an EBT are not available to creditors should the company go into bankruptcy and any potential conflicts of interest can be avoided because trustees are required to act in the interests of the beneficiaries. In the case of private companies, an EBT can also be used to create an internal market in shares.
As an employer in Hong Kong adding these tools to your employment proposition will allow you to match the best-in-class employers in a tax efficient manner. Sovereign Trust (Hong Kong) is highly experienced in consulting on and constructing these structures. Our consultants would be happy to meet with you and discuss if and how they might be of benefit to yourself and your business.