What if your Hong Kong company’s low-tax advantage suddenly triggered a multi-million dollar tax bill in another country? This is no longer a hypothetical risk. The global Base Erosion and Profit Shifting (BEPS) framework, spearheaded by the OECD, has fundamentally reshaped international tax rules. For businesses using Hong Kong as a regional hub, the era of structuring based solely on legal form is over. The new imperative is aligning your tax footprint with genuine economic substance and value creation. Navigating this shift is critical to protecting your profitability and compliance standing.

Hong Kong’s BEPS Adoption: The Core Changes You Must Understand

Hong Kong has actively implemented key BEPS measures to maintain its reputation as a compliant international business centre. This isn’t about raising Hong Kong’s own tax rates but ensuring profits are taxed where real economic activity occurs. The Inland Revenue Department (IRD) now has powerful new tools and international agreements to challenge structures lacking substance.

Pillar Two: The 15% Global Minimum Tax

The most significant change is the implementation of the Global Minimum Tax under Pillar Two. Hong Kong’s Inland Revenue (Amendment) (Taxation on Concessionary Regimes and Minimum Tax) Ordinance 2024 was enacted on June 6, 2025, and applies to fiscal years beginning on or after January 1, 2025.

For groups benefiting from Hong Kong’s two-tiered profits tax (8.25% on first HK$2 million) or other concessions, sophisticated modeling is now essential to assess potential top-up tax liabilities.

The Foreign-Sourced Income Exemption (FSIE) Regime: Substance Requirements

Fully effective from January 2024, the FSIE regime is Hong Kong’s direct response to BEPS concerns about profit shifting. It mandates that multinational entities must meet an “economic substance requirement” in Hong Kong to enjoy tax exemptions on four types of foreign-sourced income: dividends, interest, disposal gains, and intellectual property (IP) income.

Transfer Pricing & Country-by-Country Reporting (CbCR)

Hong Kong’s transfer pricing rules, codified in Division 1A of Part 8 of the Inland Revenue Ordinance (IRO), fully align with OECD guidelines. The IRD expects contemporaneous documentation (Master File and Local File) for larger transactions. Crucially, CbCR requires ultimate parent entities of large MNEs (≥ €750M revenue) resident in Hong Kong to file a report with the IRD, which may be shared automatically with other tax jurisdictions.

Strategic Actions to BEPS-Proof Your Hong Kong Operations

Proactive adaptation is essential. Here are five critical steps to ensure your Hong Kong strategy remains robust and compliant.

1. Conduct a Substance Audit

Map your Hong Kong entity’s physical premises, employee roles (CVs and job descriptions), decision-making authority, and operating expenditures. Can you demonstrate that core income-generating activities are directed and managed from Hong Kong? This is the bedrock of defending FSIE exemptions and treaty benefits.

2. Reassess Treaty Access Under New Rules

Most of Hong Kong’s 45+ Comprehensive Double Taxation Agreements (CDTAs) now include a Principal Purpose Test (PPT). This anti-abuse rule can deny treaty benefits if obtaining that benefit was one of the principal purposes of the arrangement. Your holding structure must have genuine commercial reasons beyond tax savings.

3. Model Pillar Two Impact

If you are part of a large MNE group, calculate the effective tax rate for your Hong Kong operations and other jurisdictions you operate in. Identify any jurisdictions below 15% and model potential top-up tax liabilities. Consider whether restructuring or electing into the Hong Kong Minimum Top-up Tax (HKMTT) is advantageous.

4. Review and Document Transfer Pricing

Ensure all intercompany transactions (management fees, royalties, loans, goods) are supported by contemporaneous transfer pricing documentation. Use appropriate benchmarking studies for the Asia-Pacific region. The IRD is increasingly focused on transactions involving intangible property and risk allocation.

5. Ensure CbCR and Notification Compliance

Even if your group is below the €750M threshold, maintain clean, jurisdiction-specific financial data. Hong Kong entities that are constituent entities of a foreign-reported MNE group must file a notification with the IRD. Missing deadlines can result in penalties.

The BEPS changes represent a paradigm shift, moving the goalposts from tax-driven structuring to substance-driven operations. Hong Kong’s competitive edge will increasingly be defined by its ability to host genuine, substantive business activities. The smartest strategy is no longer about minimizing a Hong Kong tax bill in isolation, but about designing a globally compliant operational footprint where profits align with real economic activity. Review your structures now, before a tax authority does it for you.