Tax Laws & Policies

Transfer Pricing between Hong Kong and Mainland China: Analysis of Major Compliance Differences

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Written by Jennifer Lee, LLM Reviewed by TAX.hk Editorial Team Published November 6, 2025 Last updated December 29, 2025

📋 Key Takeaways

• Takeaway 1: Hong Kong's transfer pricing rules came into effect from the year of assessment 2018/19, whereas China's relevant regulations are more mature and complex.
• Takeaway 2: Both jurisdictions follow the OECD's three-tiered documentation framework, but exemption thresholds, submission deadlines, and language requirements differ significantly.
• Takeaway 3: Hong Kong provides specific exemptions for domestic transactions, whereas China has no such blanket exemption; penalties and enforcement intensity also vary between the two regions.
• Takeaway 4: Key developments in 2025: Hong Kong has implemented the 15% global minimum tax, while China is stepping up digital audit enforcement.

For multinational enterprises operating in both Hong Kong and Mainland China, transfer pricing compliance is a complex challenge. Although both jurisdictions follow the OECD's BEPS (Base Erosion and Profit Shifting) principles, significant differences exist in their specific implementation, enforcement intensity, and compliance requirements. A thorough understanding of these differences is essential to avoid double taxation, reduce penalties, and ensure smooth cross-border business operations. This article will break down the key differences in transfer pricing compliance between the two regions in detail.

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Regulatory Framework Fundamentals

The regulatory foundations of transfer pricing in Hong Kong and Mainland China reflect the different tax systems and policy objectives of the two regions. Hong Kong's "territorial source" principle of taxation contrasts with China's "worldwide taxation" principle, creating markedly distinct compliance environments.

Hong Kong's Transfer Pricing Framework

Hong Kong's transfer pricing regime is a major milestone in the modernization of its tax laws. The Inland Revenue (Amendment) (No. 6) Ordinance 2018 introduced Part 8AA into the Inland Revenue Ordinance, containing two main rules:

• Section 50AAF (Transfer Pricing Rule 1): Requires transactions between associated persons to be priced on an arm's length basis, applicable from the year of assessment 2018/19 onwards.
• Section 50AAK (Transfer Pricing Rule 2): Regulates the attribution of profits to permanent establishments in Hong Kong, applicable from the year of assessment 2019/20 onwards.

On July 19, 2019, the Inland Revenue Department issued three critical Departmental Interpretation and Practice Notes (DIPN), which remain the primary guidance documents to date:

• DIPN 58: Transfer Pricing Documentation Requirements
• DIPN 59: Transfer Pricing Between Associated Persons
• DIPN 60: Attribution of Profits to Permanent Establishments

China's Transfer Pricing Framework

China's transfer pricing regulatory system is more mature and complex, having evolved over nearly two decades. Its framework comprises multi-level regulations:

• Enterprise Income Tax Law (2007) Chapter 6: Establishes the basic principles of transfer pricing.
• STA Public Notice [2009] No. 2: Implementation measures for special tax adjustments.
• STA Public Notice [2016] No. 42: Improving related-party filing and contemporaneous documentation management.
• STA Public Notice [2016] No. 64: Country-by-Country (CbC) reporting requirements.
• Various Circulars: Guidance continuously issued by the State Taxation Administration (STA).

⚠️ Important Note: China continues to strengthen enforcement through AI-driven digital audits and data-driven compliance monitoring, with a particular focus on cross-border supply chains and intellectual property-intensive structures.

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Comparison of Documentation Requirements

Both jurisdictions follow the OECD's three-tiered documentation structure; however, significant differences exist in implementation details such as thresholds, deadlines, and language requirements.

Item	Hong Kong	Mainland China
Three-Tiered Structure	Master File, Local File, Country-by-Country Report	Master File, Local File, Special Issue File, Country-by-Country Report
Effective Date	Accounting periods beginning on or after 1 April 2018 (CbC Report: 1 January 2018)	Effective from 1 January 2016
Master File Deadline	Within 9 months after the end of the accounting period	Within 12 months after the fiscal year-end of the ultimate holding company

Local File Deadline Within 9 months after the end of the accounting period By June 30 of the year following the tax year Language Requirements English or Chinese Chinese (Mandatory) Submission Timing Upon request (within 30 days of receiving notice from the tax authority) Upon request (within 30 calendar days of receiving notice) Retention Period At least 7 years (from the end of the accounting period) 10 years Special Issue File Not required By June 30 of the year following the tax year (applicable to cost sharing, thin capitalization, etc.)

Exemption Thresholds in Hong Kong

If a Hong Kong entity meets any two of the following three conditions, it is exempt from preparing the Master File and Local File:

• Total revenue does not exceed HKD 400 million
• Total asset value does not exceed HKD 300 million
• Average number of employees does not exceed 100

Local File Preparation Thresholds in China

If a Chinese entity's related-party transactions exceed the following annual thresholds, it must prepare a Local File:

• RMB 200 million (approx. HKD 276 million): Transfer of ownership of tangible assets
• RMB 100 million (approx. HKD 138 million): Transfer of financial assets
• RMB 100 million (approx. HKD 138 million): Transfer of ownership of intangible assets
• RMB 40 million (approx. HKD 55 million): Other related-party transactions

⚠️ Key Exception: Entities engaged in single-function operations (such as toll manufacturing, contract R&D, distribution) and reporting losses must prepare a Local File, regardless of the transaction amount.

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Treatment of Domestic Transactions

Hong Kong's Domestic Transaction Exemption (Section 50AAJ)

Under Section 50AAJ(2) of the Inland Revenue Ordinance, Hong Kong provides exemptions for certain domestic transactions. A domestic transaction may be excluded from transfer pricing requirements if it meets all three of the following conditions simultaneously:

1. Domestic nature: The actual provision involves trades, professions, or businesses carried on in Hong Kong by both associated parties.
2. No actual tax difference or non-business loan: Either of the following conditions is met:
   • The income arising from the transaction is taxable in Hong Kong for both parties, or
   • The transaction involves an interest-free loan and is not part of an ordinary money-lending or intra-group financing business.
3. No tax avoidance purpose: The main purpose of the provision is not to utilize the losses of any associated person to reduce Hong Kong tax liabilities.

💡 Professional Tip: Even for exempted domestic transactions, compliance with the arm's length principle under Rule 1 is still required. This exemption applies only to documentation requirements and the Inland Revenue Department's adjustment powers, and does not waive the fundamental pricing requirements.

Treatment of Domestic Transactions in China

China does not provide a blanket exemption for domestic transactions. All related-party transactions, whether domestic or cross-border, are subject to transfer pricing scrutiny as long as they meet the documentation thresholds or trigger attention from tax authorities.

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Country-by-Country Reporting

Item	Hong Kong	Mainland China
Revenue Threshold	Consolidated group revenue of HKD 6.8 billion	Consolidated group revenue of RMB 5.5 billion
EUR Equivalent	EUR 750 million	EUR 750 million
Reporting Entity	Ultimate Parent Entity or designated surrogate reporting entity	Ultimate Parent Entity or designated surrogate reporting entity

Filing Deadline Within 12 months after the end of the reporting financial year Within 12 months after the end of the reporting financial year

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Advance Pricing Arrangements (APA)

Hong Kong's APA Programme

Hong Kong introduced the APA programme in 2012, providing taxpayers with a transparent mechanism to obtain tax certainty regarding related-party transactions.

• Unilateral APA: Reached solely between the Hong Kong taxpayer and the Commissioner of Inland Revenue. Unilateral APAs are acceptable for transactions with jurisdictions that do not have a Comprehensive Double Taxation Agreement (CDTA) with Hong Kong.
• Bilateral APA: An arrangement involving the Hong Kong Inland Revenue Department and the tax authority of a relevant jurisdiction that has a CDTA with Hong Kong.
• Multilateral APA: An arrangement involving three or more tax jurisdictions.

China's APA Programme

China has a mature and active APA programme. According to reports from the State Taxation Administration:

• Total signed APAs (2005–2023): 296 (153 unilateral, 143 bilateral)
• APAs signed in 2023: 36 (9 unilateral, 27 bilateral)
• 15 consecutive years of publishing annual APA reports, demonstrating transparency.

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Penalties and Enforcement

Hong Kong's "Reasonable Effort" Principle

Under Section 82A of the Inland Revenue Ordinance, proper transfer pricing documentation serves as evidence that an enterprise has made reasonable efforts to determine the arm's length amount. If the Inland Revenue Department makes an adjustment despite the enterprise having made such reasonable efforts, the enterprise will not be liable for additional tax of up to 100% of the tax undercharged.

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Recent Regulatory Updates and 2025 Developments

Hong Kong – Implementation of Global Minimum Tax

The Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Ordinance 2025 was enacted on June 6, 2025. Key provisions include:

• Implementation of the OECD's 15% global minimum tax on MNE groups with annual consolidated revenues of EUR 750 million or more.
• Effective from January 1, 2025.
• Inclusion of the Income Inclusion Rule (IIR) and the Hong Kong Minimum Top-up Tax (HKMTT).
• Updating Hong Kong's transfer pricing rules to align with the 2022 OECD Transfer Pricing Guidelines.

China – Enhanced Digital Enforcement

2025 marks a new era of stricter enforcement in China, characterized by:

• Digitization: Integration of AI and machine learning in audit selection and risk assessment.
• Data-Driven Audits: Cross-referencing multiple data sources (tax filings, customs declarations, foreign exchange records, CbC reports).
• Real-Time Monitoring: Advanced systems to identify transfer pricing anomalies as transactions occur.
• Key Focus Areas: Cross-border supply chains, IP structures, cost-sharing arrangements, and intra-group financing.

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Strategic Compliance Considerations

For MNEs operating in both jurisdictions, the following strategic considerations are critical:

1. Unified Documentation Strategy: Prepare comprehensive global documentation that satisfies local requirements in both jurisdictions while maintaining consistency.
2. Leverage Hong Kong Domestic Transaction Exemptions: Structure Hong Kong-only operations to qualify for documentation exemptions under Section 50AAJ.

Navigating transfer pricing compliance between Hong Kong and Mainland China requires careful attention to the distinct requirements of each jurisdiction. While both follow OECD principles, their implementation differences present unique challenges for multinational enterprises. By understanding these differences and implementing a strategic compliance approach, businesses can minimize risks, avoid penalties, and ensure smooth cross-border operations. Regular consultation with qualified professionals versed in both tax systems is key to maintaining compliance in this evolving regulatory landscape.