Salaries Tax Issues arising from Abolition of the Offsetting Arrangement under Recognized Retirement Schemes

Effective date/Transition date

When was the abolition of the offsetting arrangement under the Mandatory Provident Fund schemes and recognized occupational retirement schemes implemented?

The abolition of the offsetting arrangement has taken effect since 1 May 2025 (the transition date).

Severance payment

An employee received a severance payment (SP) in accordance with his employment contract and the Employment Ordinance (EO) upon being made redundant. Is the SP chargeable to salaries tax?

The SP paid under the EO, whether or not provided in the employment contract, is not chargeable to salaries tax.

An employee was made redundant along with other employees upon closure of the employer’s business. The employer paid the employee a redundancy payment under a non-statutory redundancy scheme. The redundancy payment, which was determined by reference to the employee’s annual salary and the number of years from cessation of his employment to his normal retirement age, exceeded the amount of severance payment calculated in accordance with the Employment Ordinance (EO). Is the redundancy payment chargeable to salaries tax?

In view of the circumstantial facts (i.e. the closure of business, dismissal of a number of employees and implementation of a non-statutory redundancy scheme by the employer), the redundancy payment can be accepted as a compensation made to the employee for the loss of his employment. The entire amount of the payment, even though not made under the EO, is not chargeable to salaries tax.

Long service payment

An employee received a long service payment (LSP) in accordance with his employment contract and the Employment Ordinance (EO) upon termination of his employment contract by his employer. Is the LSP chargeable to salaries tax?

The LSP paid under the EO, whether or not provided in the employment contract, is not chargeable to salaries tax.

An employee was entitled to a long service payment (LSP) under the Employment Ordinance (EO) upon termination of his employment contract by his employer. The employer paid the employee a sum based on his years of service, which exceeded the amount of LSP calculated in accordance with the EO (statutory amount). Is the payment chargeable to salaries tax?

Only the portion equivalent to the statutory amount is exempt from salaries tax. The portion exceeding the statutory amount is taxable (section 9(1)(af) of the Inland Revenue Ordinance).

Retirement scheme benefits

An employee was entitled to a severance payment under the Employment Ordinance upon his dismissal. The severance payment was wholly offset by the accrued benefit derived from the employer’s contributions (both mandatory and voluntary) in respect of the employee under an Mandatory Provident Fund (MPF) scheme. The accrued benefit is retained in the employee’s account of the MPF scheme. Is the accrued benefit taxable?

The portion of accrued benefit attributable to the employer’s mandatory contributions is not taxable.

For the portion of accrued benefit attributable to the employer’s voluntary contributions, the employee is taken to have received that portion of benefit from the MPF scheme on the date of termination of service if it is retained in the MPF scheme or transferred to another MPF scheme (section 8(9) of the Inland Revenue Ordinance (IRO)). If the employee worked for the employer for not less than 10 years, the entire amount of that portion of benefit is exempt from salaries tax (section 8(2)(cc), (4) and (5) of the IRO). If the employee worked for the employer for less than 10 years, the excess of that portion of benefit over the proportionate benefit calculated in accordance with section 8(5) of the IRO is taxable (section 9(1)(ae) of the IRO).

An employer did not pay a severance payment to an employee as required under the Employment Ordinance. By virtue of section 12A(3) and (4) of the Mandatory Provident Fund Schemes Ordinance, the employee withdrew from his accrued benefit derived from the employer’s contributions (both mandatory and voluntary) held under an Mandatory Provident Fund (MPF) scheme an amount equal to the amount of the severance payment. The remaining balance of the employee’s accrued benefit is retained in his account of the MPF scheme. Is the employee’s accrued benefit (whether withdrawn by the employee from or retained in the MPF scheme) taxable?

Same as the answer in Q6. The portion of accrued benefit attributable to the employer’s mandatory contributions is not taxable. For the portion of accrued benefit attributable to the employer’s voluntary contributions, the excess of that portion of benefit over the proportionate benefit calculated in accordance with section 8(5) of the Inland Revenue Ordinance (IRO) is taxable (section 9(1)(ae) of the IRO).

An employer paid a severance payment to an employee as required under the Employment Ordinance. By virtue of section 12A(1) and (2) of the Mandatory Provident Fund Schemes Ordinance, the employer then withdrew from the employee’s accrued benefit derived from the employer’s contributions (both mandatory and voluntary) held under the Mandatory Provident Fund (MPF) scheme an amount equal to the amount of the severance payment. The remaining balance of the employee’s accrued benefit is retained in his account of the MPF scheme. Is the employee’s accrued benefit (whether withdrawn by the employer from or retained in the MPF scheme) taxable?

The accrued benefit withdrawn by the employer from the MPF Scheme has no salaries tax implication on the employee because such benefit was not received by the employee.

For the accrued benefit retained in the MPF scheme, the same treatments mentioned in the answer in Q6 apply. The portion of accrued benefit attributable to the employer’s mandatory contributions is not taxable. For the portion of accrued benefit attributable to the employer’s voluntary contributions, the excess over the proportionate benefit calculated in accordance with section 8(5) of the Inland Revenue Ordinance (IRO) is taxable (section 9(1)(ae) of the IRO).

Gratuity

An employee was entitled to a long service payment (LSP) under the Employment Ordinance and a gratuity, which is based on the same years of service for which the LSP is payable, upon expiry of his employment contract without being renewed. The LSP was fully offset by the gratuity paid to the employee. Is the gratuity chargeable to salaries tax?

The gratuity is an income from employment chargeable to salaries tax.

Offsetting arrangement not followed

10.

An employer made a payment to an employee based on his years of service upon termination of his employment contract in the circumstances described in section 31R of the Employment Ordinance (EO). The payment was made with no deduction of any amount of accrued benefit held under the Mandatory Provident Fund (MPF) scheme in respect of the employee that was available for offsetting. Also, the employer did not withdraw any amount from the employee’s accrued benefit attributable to the employer’s contributions held under the MPF scheme. The accrued benefit is retained in the employee’s account of the MPF scheme. Is the payment received by the employee chargeable to salaries tax?

The payment (which could be but have not been offset by the accrued benefit) is exempt from salaries tax, but only to the extent of the statutory amount of long service payment calculated in accordance with section 31V of the EO (section 8(2)(ce) and 8(2B) of the Inland Revenue Ordinance).

11.

An employer made a payment to an employee upon expiry of his employment contract in the circumstances described in section 31R of the Employment Ordinance without offsetting any part of the payment by the gratuity paid to the employee. Both the payment and gratuity were based on the same years of service of the employee. Is the payment received by the employee chargeable to salaries tax?

Same as the answer in Q10. The payment (which could be but have not been offset by the gratuity) is exempt from salaries tax, but only to the extent of the statutory amount of long service payment calculated in accordance with section 31V of the EO (section 8(2)(ce) and 8(2B) of the Inland Revenue Ordinance).