For decades, Hong Kong’s straightforward territorial tax system and low rates have been a cornerstone of its appeal to global business. But what happens when the global rulebook is rewritten? The OECD’s BEPS 2.0 framework, particularly its 15% global minimum tax (Pillar Two), is not just another compliance update—it’s a fundamental shift that redefines what constitutes legitimate tax planning. For multinationals with a presence in Hong Kong, the critical question is no longer just about the rate, but about proving substantial economic activity. The era of ‘brass plate’ operations is conclusively over.

BEPS 2.0 and Hong Kong: From Low Tax to Substantial Activity

The Base Erosion and Profit Shifting (BEPS) 2.0 initiative, led by the OECD, aims to ensure multinational enterprises (MNEs) pay a fair share of tax wherever they operate. For Hong Kong, the most immediate and impactful component is Pillar Two, which introduces a global minimum effective tax rate of 15% for large MNEs (with consolidated group revenue of EUR 750 million or more). Hong Kong formally enacted its Pillar Two rules—the Income Inclusion Rule (IIR) and the Hong Kong Minimum Top-up Tax (HKMTT)—on June 6, 2025, with effect from January 1, 2025.

While Hong Kong’s headline corporate tax rate of 16.5% is above the 15% floor, the implications are profound for groups with operations in lower-tax jurisdictions. More importantly, BEPS principles have already been integrated into Hong Kong’s domestic law, most notably through the Foreign-Sourced Income Exemption (FSIE) regime. This regime, fully effective from January 2024, requires entities claiming exemptions on foreign-sourced dividends, interest, disposal gains, and IP income to demonstrate adequate economic substance in Hong Kong.

The Evolving Substance Test: What “Central Management and Control” Means Now

Hong Kong tax residency for companies has always been determined by where “central management and control” is exercised. In the post-BEPS world, the Inland Revenue Department (IRD) interprets this concept with a much sharper focus on genuine, substantive activity. A registered address and occasional board meetings are insufficient. Companies must now be prepared to demonstrate:

Strategic Implications and Action Plan for Businesses

The convergence of Pillar Two and enhanced substance rules requires a proactive, strategic review of your Hong Kong operations. Waiting for a tax audit or a residency certificate rejection is a high-risk strategy.

1. Conduct a Substance Health Check

Audit your current Hong Kong entity against the IRD’s substance criteria. Key red flags include nominee directors, bank accounts managed from overseas, and contracts signed outside Hong Kong. Document all evidence of local management and operations meticulously.

2. Map Your Group’s Global Tax Position

Even if your Hong Kong company is compliant, other group entities in low-tax jurisdictions could bring the group’s overall effective tax rate below 15%, triggering Pillar Two top-up taxes. Work with advisors to model the impact across your entire multinational structure.

3. Align Business Operations with Tax Strategy

Consider consolidating regional management functions, intellectual property, or treasury activities into your Hong Kong entity to build undeniable substance. This transforms it from a holding shell into a genuine regional headquarters, justifying its tax position and enhancing operational efficiency.

Hong Kong’s Competitive Edge in the New Era

Hong Kong is not resisting global tax reforms but adapting its model to remain competitive within them. The city’s response—enacting Pillar Two, refining the FSIE regime, and introducing the FIHV regime—demonstrates a commitment to international standards while preserving core advantages. The territorial system, with no tax on capital gains, dividends, or sales, remains intact. The challenge and opportunity for businesses is to pair these inherent benefits with real economic substance.

BEPS 2.0 marks the end of tax planning based on jurisdiction shopping alone. For Hong Kong, the future lies in being a jurisdiction where global businesses establish genuine, substantive operations that contribute real value. For companies, the path forward is clear: integrate your tax strategy with your business strategy, invest in substance, and treat Hong Kong not as a postbox, but as a true home for your regional ambitions.