Is your business prepared for Hong Kong’s transformed tax landscape? Over the past two years, the city has undergone a seismic shift in tax regulations, driven by international cooperation and global tax reforms. The Inland Revenue Department (IRD) has fundamentally reshaped its audit approach to match these changes, creating new compliance challenges for multinational enterprises and local businesses alike. Understanding these evolving priorities isn’t just about avoiding penalties—it’s about thriving in Hong Kong’s new tax reality.

Hong Kong’s Tax Revolution: Four Game-Changing Reforms

Hong Kong’s tax framework has evolved dramatically since 2023, moving from its traditionally simple territorial system to a sophisticated international tax regime. These changes reflect Hong Kong’s commitment to global tax cooperation while maintaining its competitive edge as Asia’s premier financial hub.

1. Pillar Two: Hong Kong Joins the Global Minimum Tax Club

On June 6, 2025, Hong Kong gazetted landmark legislation implementing the OECD’s BEPS 2.0 Pillar Two framework. This isn’t just another tax change—it’s a fundamental shift in how multinational enterprises operating in Hong Kong will be taxed globally.

What Pillar Two Actually Means for Your Business:

• Hong Kong Minimum Top-up Tax (HKMTT): A domestic minimum tax ensuring MNE groups pay at least 15% effective tax rate on Hong Kong-sourced income
• Income Inclusion Rule (IIR): Effective retroactively from January 1, 2025, requiring parent entities to pay top-up tax on low-taxed foreign subsidiaries
• EUR 750 Million Threshold: Applies to MNE groups with annual consolidated revenue of at least EUR 750 million in two or more of the preceding four fiscal years
• Postponed UTPR: The Undertaxed Profits Rule has been postponed for further study, giving businesses some breathing room

Critical Filing Deadlines You Can’t Miss:

1. Top-Up Tax Notification: Must be filed within 6 months of fiscal year end—this informs the IRD that your group is within scope and identifies the designated filing entity
2. Top-Up Tax Return (including GIR): Must be filed within 15 months of fiscal year end (18 months for the first transition year)

Example Timeline: For a fiscal year ending December 31, 2025, your notification is due by June 30, 2026, and your return by March 31, 2027. The IRD is already proactively issuing bulk letters to in-scope MNE groups, requesting entities to assess their status and complete reply slips within two months.

2. FSIE 2.0: The Expanded Foreign-Sourced Income Exemption Regime

Originally introduced in January 2023, the FSIE regime was Hong Kong’s response to EU compliance requirements. The expanded “FSIE 2.0” regime, effective January 1, 2024, significantly broadens what’s covered—and what’s not.

Key Changes in FSIE 2.0:

• Expanded Asset Coverage: Now covers foreign-sourced gains from disposal of ALL types of assets—movable property, immovable property, financial assets, and non-financial assets—regardless of whether capital or revenue in nature
• Previous Scope (FSIE 1.0): Only covered dividends, interest, IP income, and equity disposal gains
• Intra-Group Transfer Relief: New relief mechanism to defer taxation when property is transferred between associated entities, subject to anti-abuse rules
• Trader Exclusion: Foreign-sourced disposal gains from non-IP assets derived by asset traders are excluded from the FSIE regime
• Historical Cost Basis: Disposal gains are calculated based on historical acquisition cost—the EU rejected Hong Kong’s rebasing proposal

3. Stamp Duty Abolition: The End of “Spicy Measures”

In the 2024/25 Budget delivered on February 28, 2024, the Financial Secretary announced the immediate abolition of all demand-side management measures (DSMMs) for residential properties. This marked the end of over 13 years of “spicy measures” designed to cool Hong Kong’s property market.

What Was Abolished (effective February 28, 2024):

• Buyer’s Stamp Duty (BSD): Previously imposed on non-Hong Kong permanent residents and companies acquiring residential property
• Special Stamp Duty (SSD): Previously charged up to 20% on properties sold within 24 months of acquisition
• New Residential Stamp Duty (NRSD): Previously imposed at 15% on certain categories of buyers

The Stamp Duty (Amendment) Ordinance 2024 was passed by the Legislative Council on April 10, 2024, and gazetted on April 19, 2024. Any instrument executed on or after February 28, 2024, for the sale and purchase or transfer of residential property is no longer subject to these additional stamp duties.

4. Transfer Pricing: The IRD’s New Enforcement Priority

The IRD has significantly escalated transfer pricing enforcement in response to bilateral pressure from competent authorities worldwide and Hong Kong’s commitment to OECD guidelines. The 2025 Pillar Two legislation also updated Hong Kong’s transfer pricing rules to align with the 2022 OECD Transfer Pricing Guidelines.

Enhanced Documentation Requirements:

• Master File and Local File: Must be prepared within 9 months of accounting year end
• IR1475 Form: Summary of transfer pricing information that must be submitted within one month upon IRD request
• Exemption Thresholds: Hong Kong entities are exempt from preparing Master/Local Files if they satisfy any two of the following: total revenue ≤ HKD 400 million, total assets ≤ HKD 300 million, or average employees ≤ 100

How IRD Audits Have Evolved: New Focus Areas

The IRD has fundamentally restructured its audit approach to address the complexities introduced by recent legislative changes. Unit 4 of the IRD, responsible for combating tax evasion and avoidance, has expanded its capabilities to ensure compliance across these new regulatory dimensions.

Pillar Two Audit Procedures: What to Expect

The implementation of Pillar Two has introduced entirely new audit procedures and compliance requirements. The IRD has issued bulk letters to potentially in-scope MNE groups, requesting recipients to:

• Assess whether they belong to an in-scope MNE group (revenue ≥ EUR 750 million)
• Complete and return reply slips within two months
• Designate a filing entity for the group
• Identify the jurisdiction providing the GIR to Hong Kong

GloBE Safe Harbours: Hong Kong has implemented several OECD-approved safe harbours to reduce compliance burden:

• Transitional Country-by-Country Reporting Safe Harbour: Relieves full GloBE calculations when certain CbCR conditions are met
• Transitional UTPR Safe Harbour: Temporary relief from UTPR calculations
• QDMTT Safe Harbour: Recognition of qualifying domestic minimum top-up taxes
• Simplified Calculations Safe Harbour: Available for non-material constituent entities

FSIE Audit Scrutiny: New Compliance Challenges

The expansion of the FSIE regime from January 1, 2024, has created new audit challenges, particularly around disposal gains from all asset types. The IRD is particularly focused on:

• Asset Categorization: Verifying whether disposal gains are properly classified as capital or revenue in nature
• Foreign vs. Domestic Source: Ensuring disposal gains are genuinely foreign-sourced and meet exemption criteria
• Economic Substance: Confirming that CIGA (Core Income Generating Activities) or NREO (Nexus Requirements for Equity Interests and Immovable Property) requirements are satisfied
• Historical Cost Documentation: Verifying acquisition costs since rebasing was not permitted
• Intra-Group Transfer Relief: Ensuring anti-abuse conditions are met when claiming deferral

Compliance Best Practices: Your Action Plan

1. Establish Robust Documentation Systems

The foundation of audit defense is comprehensive, contemporaneous documentation:

• 7-Year Retention: Maintain all business records, invoices, contracts, and correspondence for at least 7 years
• Audit Trail Completeness: Ensure all financial transactions are fully traceable from source documents through to tax returns
• Real-Time Documentation: Document decisions, substance, and rationale contemporaneously, not retrospectively during audits
• Digital Systems: Implement secure, organized digital filing systems for easy retrieval during IRD inquiries

2. Proactive Pillar Two Compliance for MNE Groups

For groups potentially within the EUR 750 million threshold:

1. Revenue Monitoring: Track consolidated group revenue across the four preceding fiscal years
2. Early IRD Engagement: Respond promptly to IRD letters and complete reply slips within deadlines
3. GIR Preparation: Begin preparing GloBE Information Returns well in advance of filing deadlines
4. Safe Harbour Analysis: Evaluate eligibility for available safe harbours to reduce compliance burden
5. E-Filing Readiness: Prepare for mandatory e-filing of profits tax returns from assessment year 2025/26
6. Effective Tax Rate Monitoring: Calculate and monitor effective tax rates by jurisdiction to identify potential top-up tax exposure

3. FSIE Compliance Framework

Given the expanded scope of FSIE 2.0:

• Asset Disposal Tracking: Implement systems to identify and track all asset disposals, not just equity interests
• Historical Cost Records: Maintain detailed acquisition cost documentation for all assets
• Substance Documentation: For FSIE exemption claims, maintain evidence of CIGA or NREO compliance
• Intra-Group Transfer Planning: Document the business purpose and anti-abuse compliance for intra-group transfers claiming deferral relief
• Tax Certainty Scheme: For onshore equity disposals, verify 15% ownership and 24-month holding period requirements

4. Strengthen Transfer Pricing Governance

To manage escalating transfer pricing audit risk:

• Timely Documentation: Prepare Master Files and Local Files within the 9-month deadline
• Annual Updates: Review and update transfer pricing documentation annually to reflect current operations
• Arm’s Length Testing: Conduct regular benchmarking studies to verify pricing is within arm’s length range
• IR1475 Readiness: Maintain summary information ready for submission within one month if requested
• APA Consideration: For significant related-party transactions, evaluate whether an Advance Pricing Arrangement would provide valuable certainty

Penalties and Consequences: What’s at Stake

Hong Kong’s tax landscape has undergone transformative change, but the city remains one of the world’s most competitive business environments. The two-tier profits tax system (8.25% for the first HK$2 million, 16.5% thereafter for corporations) continues to offer significant advantages. However, the days of minimal tax compliance requirements are over. Businesses that invest in comprehensive compliance frameworks, stay informed about legislative changes, and maintain excellent documentation will not only manage audit risk effectively but will also thrive in Hong Kong’s evolving international tax environment.