For Hong Kong’s small and medium-sized enterprises (SMEs), navigating the tax landscape can feel like steering through shifting currents. While the city’s low and simple tax regime remains a cornerstone of its competitiveness, recent strategic reforms demand a proactive approach. From the abolition of property cooling measures to the implementation of global tax standards, these changes are reshaping compliance and planning. Misunderstanding these updates—whether through overcaution or complacency—can lead to missed opportunities or unexpected liabilities. This guide cuts through the noise, providing a clear, fact-checked overview of what Hong Kong’s latest tax reforms mean for your business today.

The Core Reforms: What Has Actually Changed?

Hong Kong’s tax system is evolving to maintain its global standing while meeting international obligations. The most significant recent changes are not about raising headline rates but about refining rules and removing barriers in key areas.

1. Property Stamp Duty: A Major Thaw

In a move to revitalise the property market, the Hong Kong Government abolished all additional ad valorem stamp duty (AVD) measures on residential property transactions with effect from 28 February 2024. This means:

2. The Foreign-Sourced Income Exemption (FSIE) Regime

Implemented to align with international tax standards, the FSIE regime affects Hong Kong companies receiving specified foreign-sourced income. Since the expanded Phase 2 took effect in January 2024, the rules now cover:

• Dividends
• Interest
• Disposal gains from equity interests
• Income from intellectual property (IP)

To claim an exemption for such income (other than IP income), a company must meet an “economic substance” requirement in Hong Kong. For SMEs with holding or treasury functions, this means ensuring you have an adequate level of employees, operating expenditures, and premises in the city to manage those activities.

3. Global Minimum Tax (Pillar Two)

Hong Kong formally enacted the Global Minimum Tax rules on 6 June 2025, with effect from 1 January 2025. This regime imposes a 15% minimum effective tax rate on large multinational enterprise (MNE) groups with consolidated annual revenue of €750 million or more.

While this primarily targets large multinationals, it has a trickle-down effect. SMEs that are part of such a group, or that do business with companies affected by it, may face new compliance requests and need to understand how the Hong Kong Minimum Top-up Tax (HKMTT) works to protect the local tax base.

Leveraging Hong Kong’s Enduring Tax Advantages for SMEs

Amidst these reforms, Hong Kong’s fundamental tax advantages remain robust and highly beneficial for SMEs. A strategic understanding of these can provide a significant competitive edge.

The Two-Tiered Profits Tax: A Tailored Benefit

Introduced to support business growth, the two-tiered profits tax rates offer substantial savings for smaller enterprises. For the 2024/25 year:

• Corporations: 8.25% on the first HK$2 million of assessable profits, and 16.5% on the remainder.
• Unincorporated Businesses: 7.5% on the first HK$2 million, and 15% on the remainder.

This structure is designed to help SMEs retain capital for reinvestment. However, it’s crucial to remember the “one entity per group” rule. If your business operates through multiple connected entities, only one can elect to use the lower tax tier on its first HK$2 million of profits.

What Hong Kong Still Doesn’t Tax: Your Strategic Levers

Hong Kong’s territorial source principle and specific exemptions continue to offer unparalleled flexibility. Savvy SMEs structure their operations to maximise these features:

• No Capital Gains Tax: Profits from the sale of capital assets (like shares or business premises) are generally not taxable.
• No Dividend Withholding Tax: Dividends paid by a Hong Kong company to local or foreign shareholders are not subject to tax.
• No Sales Tax/VAT/GST: There is no broad-based consumption tax, simplifying pricing and accounting.
• No Estate or Inheritance Duty: Facilitates succession planning for family-owned SMEs.

Actionable Strategies for Proactive Tax Management

Turning compliance from a chore into a strategic advantage requires a forward-looking approach. Here’s how successful Hong Kong SMEs are adapting.

Documentation is Your Defence (and Opportunity): With the FSIE and global minimum tax rules emphasizing substance, maintaining clear records is more critical than ever. This includes:

• Detailed management meeting minutes showing strategic decisions made in Hong Kong.
• Employment contracts and job descriptions for key personnel based in the city.
• Contracts clearly stating the roles and risks undertaken by your Hong Kong entity.
• Transfer pricing documentation for cross-border transactions with related parties.

This documentation not only satisfies compliance requirements but can also be leveraged to demonstrate stability and good governance to banks and potential investors.

Hong Kong’s tax reforms signal a maturation of its system, aligning with global standards while preserving its core low-tax, pro-business ethos. For SMEs, the path forward is not about fearing complexity but about embracing clarity. By understanding the refined rules—from the abolished stamp duties to the new substance requirements—you can make informed decisions that secure your tax advantages, ensure robust compliance, and ultimately fuel your business’s growth in Hong Kong and beyond.