Imagine a European tech firm, thrilled to establish its Asian hub in Hong Kong, only to face an unexpected tax bill because it assumed its overseas dividends were automatically tax-free. Or consider a family office that structured its investments without realizing new “economic substance” requirements had come into force. These aren’t hypotheticals; they are real compliance pitfalls for businesses navigating Hong Kong’s unique and evolving tax landscape. While famously simple and low-tax, Hong Kong’s system has precise rules and recent international reforms that can trip up the unprepared. Understanding what Hong Kong does—and crucially, does not—tax is the first step to leveraging its advantages fully and avoiding costly mistakes.

Mistake 1: Assuming All Overseas Income is Automatically Tax-Free

A cornerstone of Hong Kong’s appeal is its territorial tax system: only profits sourced in Hong Kong are subject to Profits Tax. This has led many to believe all foreign income is exempt. However, the Foreign-Sourced Income Exemption (FSIE) regime, fully effective from January 2024, changes this for multinational enterprises (MNEs). Dividends, interest, disposal gains, and intellectual property income received in Hong Kong are now subject to specific conditions to qualify for exemption.

Mistake 2: Misunderstanding the Two-Tiered Profits Tax System

Introduced to support SMEs, Hong Kong’s two-tiered Profits Tax system offers reduced rates on the first HK$2 million of assessable profits. However, a critical and often overlooked restriction applies: only one entity within a group of “connected entities” can benefit from the lower tier. Connected entities are broadly defined by common control, such as companies under the same ultimate ownership.

Mistake 3: Overlooking Stamp Duty Reforms in Property Transactions

Stamp duty is a significant cost in property acquisitions. A major reform took effect on 28 February 2024, abolishing all demand-side cooling measures. Businesses and individuals planning property investments must use the current rates and not rely on outdated information.

Mistake 4: Ignoring the Global Minimum Tax (Pillar Two)

Hong Kong enacted the Global Minimum Tax rules on 6 June 2025, effective from 1 January 2025. This is not a traditional Hong Kong tax but an international framework that applies to large multinational groups. If your group’s consolidated revenue is €750 million or more in at least two of the previous four years, you are likely in scope.

The rules aim to ensure these groups pay a minimum effective tax rate of 15% in every jurisdiction they operate. Hong Kong’s implementation includes an Income Inclusion Rule (IIR) and a Hong Kong Minimum Top-up Tax (HKMTT). This means if a Hong Kong entity’s effective tax rate falls below 15%, a top-up tax may be payable in Hong Kong or to the jurisdiction of the ultimate parent entity.

Mistake 5: Poor Record-Keeping and Missing Deadlines

Hong Kong’s tax system is self-assessing, placing the burden of compliance on the taxpayer. The Inland Revenue Department (IRD) can raise assessments for up to 6 years (extending to 10 years in cases of fraud or wilful evasion). Inadequate records are a common trigger for audits and disputes.

Hong Kong’s tax system remains one of the world’s most competitive, but its simplicity should not be mistaken for a lack of sophistication. The introduction of international standards like the FSIE regime and Global Minimum Tax requires proactive review and adaptation. By moving beyond basic assumptions, understanding the precise rules, and maintaining rigorous compliance, businesses can fully secure Hong Kong’s fiscal advantages while building a resilient and sustainable operation in Asia.