IRS Tax Treatment of Hong Kong MPF & Other Income
US Tax of Hong Kong Provident Fund: The United States taxes U.S. persons on their worldwide income. Therefore, when a person is a either a U.S. citizen, Legal Permanent Resident, or Foreign National who meets the Substantial Presence Test, then they are subject to IRS Tax and Reporting on their worldwide income and assets.
When it comes to the U.S. Taxation of Hong Kong, there are several moving parts to be aware of.
Complicating the tax analysis is the fact that there is no income tax treaty, totalization agreement or estate tax treaty between the U.S. and Hong Kong — this is despite the fact that Hong Kong is a major global hub for business.
When it comes to Hong Kong and U.S. Income, the two main issues are:
- Taxation of Earned Income
- Taxation of Retirement Mandatory Provide Fund Income
Let’s explore the tax consequences:
U.S. Tax on Hong Kong Income
Common forms of income, include:
- Employment and Consulting Income
- Capital Gains
- Real Estate Income
- Pension and Retirement Income
Employment and Consulting Income
The U.S. taxes U.S. persons on worldwide income.
Therefore, if a U.S. person earns income that is sourced in Hong Kong, they will be subject to U.S. tax on that income. Even if the income is tax-free or tax-exempt in Hong Kong, it is generally taxable in the U.S.
Dividends are Taxed as either Qualified or non-qualified, and it is a 2-part analysis:
In order to be considered “qualified”, dividends received must meet all three conditions:
- Dividends paid by a U.S. corporation or a qualified foreign corporation.
- The dividends are not the type that are deemed not qualified to be “qualified dividends”
- The holding period requirement for becoming a qualified dividend is met.
What is a Qualified Foreign Corporation?
- The (foreign) corporation is also incorporated in a U.S. possession; or
- The foreign corporation is the type of corporation that is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose, and that includes an exchange of information program; or
- The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States.
Capital Gains can be taxed as Short-Term or Long-Term.
In the U.S, Long-Term Capital Gains are capital gains for stock sales held for more than 1-year. Even if the Long-Term rates are different in the foreign country of source, the LTCG rules would still apply for U.S. capital gain purposes.
Foreign Interest Income is taxed the same way that U.S. interest income is. It is included and grossed-up into a person’s income, to arrive at their progressive tax rate.
Even if the foreign interest income is accruing in a Term Deposit or similar, the accrued, non-distributed earnings are included.
Real Estate Income
Foreign rental income can be understandably confusing for many taxpayers.
That is because it is reportable in the U.S. just as if it were U.S. rental income. Therefore, even if the taxpayer nets a loss after deductions are taken, the IRS requires the total income and expenses on the Schedule E.
The IRS does allow depreciation (which is not permitted in many countries outside of the U.S.), which can help to reduce the overall tax liability.
U.S. Tax of Hong Kong MPF
The most common retirement vehicle for foreign nationals of Taiwan is the MPF.
Unlike the United States, many foreign countries do not have a traditional social security system in place. Rather, as is common in Asian countries such as Hong Kong, Thailand and Singapore, they have developed “provident funds.”
One of the more common provident funds we handle is the Hong Kong provident fund (MPF) and how to treat it in the U.S. for tax and reporting purposes.
Other Provident Fund Treatment
The IRS has not issued much if any memoranda or rulings to date on the taxation of the MPF.
But the IRS has issued memoranda about the Singaporean CPF (Central Provident Fund). The programs are similar (not identical). But like Singapore, Hong Kong does not have a tax treaty or totalization agreement with the U.S.
Therefore, chances are the IRS will treat the MPF similar to the CPF.
How does the MPF Categorize Itself?
As provided by the MPF system website:
“Due to low birth rates and increased life expectancies, Hong Kong is facing the challenge of a rapidly ageing population. As the population collectively grows older, the working population will have a much larger number of retirees to support.
the MPF System in Hong Kong was designed to form the second pillar of this approach: a mandatory, privately managed, fully funded contribution scheme.
To help the ageing workforce save for their retirement, the Mandatory Provident Fund Schemes Ordinance (“MPFSO”) was enacted in 1995 and later supplemented by subsidiary legislation in 1998, 1999 and 2000.”
The MPF System was launched in December 2000.
World Bank Pillars Framework
In 2005 (expanding the prior 1990s framework), the World Bank provided a 5-Pillar Approach (pillars 0,1,2,3 and 4) in support of “old Age Protection.”
Pillar Zero: a non-contributory, publicly financed and managed system that provides a minimal level of protection for retirement;
Pillar One: a mandatory, contributory and publicly managed system;
Pillar Two: a mandatory, privately managed, fully funded contribution system;
Pillar Three: voluntary savings (e.g. personal savings and insurance); and
Pillar Four: informal support (e.g. family support), other formal social programmes (e.g. health care and housing), and other individual assets (e.g. home ownership).
[T] he MPF System remains the Pillar 2 system of retirement protection in Hong Kong.
This is important, because unlike the U.S. (Pillar 1), Hong Kong is not a publicly managed fund.
SSA & MPF (Social Security Administration)
The SSA provides the following when it comes to MPF:
Note: Mandatory provident funds in Hong Kong are mandatory occupational funds that are privately run and should not be confused with publicly run national provident funds found in other countries.
U.S. Tax Impact of MPF as Privately Funded
The MPF is a private form of old age protection. Unlike the U.S., the MPF is privately managed.
Therefore, the MPF is not similar to Social Security in the U.S., other than the fact that it s “mandatory” and funded through employment.
MPF Distinguished from U.S. Social Security
As summarized from the Mandatory Provident Fund Schemes Authority
- The MPF refers to itself as Retirement Protection (not Social Security)
- Certain Income contribution requirements from Employers and Employees
- Voluntary Contributions are permitted
- Immediately Vested Contributions (and Growth)
- Can withdraw benefits or lump sum when Permanently Depart Hong Kong
- Accrued benefits may be claimed at death as part of the Member’s Estate
Social Security in the U.S.
- It goes into a single fund.
- Unless A totalization agreement applies, U.S. person submit to it, whether or not the Employer is U.S. or Foreign (some limitations may apply)
- There is no distinction between who owns “what” portion
- Taxpayers cannot choose the investment
- Taxpayers cannot cash out
- If you die before you receive any…your loved ones cannot “cash out” (Spouse payments)
- There is no account number
- You can withdraw the full amount based on various milestones or loss of nationality
- You do not have to contribute if you work for a non-Singapore employer
- You can apply funds during your lifetime (example to “secure” government funded housing”)
U.S. Tax Treatment as Social Security or Pension?
The MPF most closely resemble pension. The MPF refers to itself as pension and it is privately managed.
Moreover, the full amount of benefits may be withdrawn, and the contributions and accrued benefits immediately vest.
No Treaty, No Form 8833
Form 8833 is used when Taxpayers want to rely on an international tax treaty and take a treaty position. Since there is no treaty with Singapore, there is no treaty position Form 8833 position to take.
By not reporting the income that is immediately accruing on a U.S. Tax Return, it may lead to future penalties and interest.
Depending on the size of the account, this may be substantial.
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