Hong Kong’s abolition of the Mandatory Provident Fund (MPF) offsetting arrangement took effect on 1 May 2025. As a global employer, you may want to understand what it means for your globally mobile workforce and understand the implications for both employers and employees, especially in the context of global mobility:
In Hong Kong, severance payment (SP) and long service payments (LSP) are mandated under the Employment Ordinance. Upon termination of employment, employees may be entitled to SP and/or LSP depending on their continuous service periods and their employment arrangements.
Prior to 1 May 2025, SP and LSP could be offset by the accrued benefits derived from the employer’s MPF contributions. Effective from 1 May 2025, this offsetting arrangement is abolished meaning that employers can no longer use the accrued benefits derived from MPF mandatory contributions to offset the post-transition portion of SP/LSP in case of termination of employment. However, employers may still offset SP/LSP by using the accrued benefits derived from employer’s voluntary MPF contributions. To assist employers to adapt to this change, the Government implemented a 25-year subsidy scheme to subsidize employer’s expenses of the post-transition portion of SP/LSP.
This change also applies to employees who join the MPF-exempted ORSO schemes. For these ORSO schemes, additional steps are needed to calculate a portion of the accrued benefits derived from employers’ ORSO contribution to be the non-offsetable portion. For non-MPF exempted ORSO schemes, employers can continue to use the employees’ vested benefits attributable to the employers’ contributions to offset SP/LSP.
For information, MPF is a compulsory retirement savings scheme in Hong Kong. All employees are required to join an MPF scheme or an MPF-exempted ORSO scheme (i.e. an ORSO scheme with MPF exemption), including expatriate employees working in Hong Kong, unless an individual is considered an exempt person. Examples of exempt person include individuals who enter Hong Kong under section 11 of the Immigration Ordinance for the purpose of employment and either (1) have a visa validity for not more than 13 months or (2) are considered members of a retirement scheme of a place outside Hong Kong. However, kindly note that the individual will cease to be an exempted person if the validity of an employment visa is extended to more than 13 months, unless other criteria are fulfilled. Since MPF is different from pensions / social security, the general concept of totalisation agreement is not relevant.
Understanding taxability of termination payments
While severance/long service payment computed in accordance with the Employment Ordinance is tax-exempt, any payments made by employers as compensation for services rendered (or to be rendered) are taxable in the hands of employees from a Hong Kong salaries tax perspective. However, based on case laws, certain payments made in conjunction with termination of employment may not be taxable if they are made for “something else”. For instance, payment that is linked to restrictive covenants or compensation for loss of office may be considered non-taxable based on the documents and circumstances.
It is not uncommon that employees, including but not limited to expatriate employees, receive separation payments in lieu of the statutory SP or LSP upon termination of employment. When determining whether a separate payment should fall outside Hong Kong salaries tax, a thorough examination of the relevant facts and circumstances leading to the payment is necessary, including scrutiny of pertinent documents like employment contracts and correspondence between employers and employees. As such, the employer and the taxpayer should be cautious at all stages starting from drafting the employment contract to execution of the termination agreement, especially when answering any requisitions raised by the Inland Revenue Department (IRD).
The abolition of MPF offsetting can lead to increased cost for employers. Understanding the new regulations is essential for effectively navigating these changes and complying with local laws.
For globally mobile talents, employers should first evaluate whether they are required to be enrolled into MPF. The relevant MPF cost should be considered, especially if employers also make voluntary contributions on top of mandatory contributions to MPF. Employees are advised to understand the individual income tax implications relating to employer’s and employee’s MPF contributions in Hong Kong as well as in other tax jurisdictions (if the employees are also subject to tax in other jurisdictions).
When it comes to termination of employment, employers are advised to consider how termination payments are structured to ensure compliance with local regulations and adherence to internal policies. The taxability of termination payments can be complex depending on the facts and circumstances of the departing employees. Planning in advance to assess taxability and determine tax reporting requirements is recommended.
For a deeper discussion on the above, please reach out to your Vialto Partners point of contact, or alternatively:
James Clemence
Asia Pacific CEO
Bruce Lee
Hong Kong SAR Territory Leader
Adam Chiu
Partner
Steven Lim
Partner
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