Hong Kong’s low and simple tax system has been a cornerstone of its appeal for multinational corporations. But is the era of “set-and-forget” tax compliance over? With the global implementation of the OECD’s BEPS 2.0 framework, including a 15% global minimum tax, CFOs and tax directors must navigate a new landscape of transparency and substance. The challenge is no longer just about low rates—it’s about proving your business’s economic footprint in Hong Kong meets international scrutiny. How can your company adapt without losing its competitive edge?

Hong Kong’s Strategic Adoption of Global Tax Standards

Hong Kong has proactively implemented key pillars of the OECD’s Base Erosion and Profit Shifting (BEPS) project to maintain its reputation as a compliant and attractive international business hub. This strategic move balances adopting global standards with preserving core advantages like its territorial tax system and network of over 45 comprehensive double taxation agreements (CDTAs). The Inland Revenue Department (IRD) is focused on ensuring that the benefits of Hong Kong’s tax system are accessed by businesses with real economic activity in the city.

The 15% Global Minimum Tax: Pillar Two is Here

The most significant change is the enactment of the Global Minimum Tax under Pillar Two. Hong Kong passed the necessary legislation on June 6, 2025, with an effective date of January 1, 2025. This regime imposes a top-up tax to ensure that large multinational enterprise (MNE) groups pay a minimum effective tax rate of 15% in every jurisdiction they operate.

Hong Kong’s legislation includes both the Income Inclusion Rule (IIR), which charges top-up tax at the ultimate parent entity level, and the Hong Kong Minimum Top-up Tax (HKMTT), which allows Hong Kong to collect the top-up tax on low-taxed profits arising locally. This ensures other jurisdictions do not collect tax that Hong Kong has the primary right to.

Country-by-Country Reporting: Transparency is Non-Negotiable

Aligning with BEPS Action 13, Hong Kong requires Country-by-Country (CbC) Reports from the ultimate parent entities of MNE groups that meet the €750 million revenue threshold. This report provides tax authorities with a high-level overview of the group’s global allocation of income, taxes paid, and economic activity. The filing deadline is within 12 months of the group’s financial year-end.

Substance Over Form: The FSIE and Transfer Pricing Imperative

Two regimes underscore Hong Kong’s shift towards taxing economic substance: the Foreign-Sourced Income Exemption (FSIE) and strengthened transfer pricing rules.

The Expanded FSIE Regime

Effective January 2024, Hong Kong’s FSIE regime was expanded beyond foreign-sourced passive income. To claim a tax exemption for foreign-sourced dividends, interest, disposal gains, and IP income, a company must now meet specific economic substance requirements in Hong Kong. For non-IP income, this generally means having an adequate number of qualified employees and incurring adequate operating expenditures in Hong Kong to carry out the relevant activities.

Navigating Transfer Pricing Scrutiny

Hong Kong’s transfer pricing rules, codified in the Inland Revenue (Amendment) (No. 6) Ordinance 2018, mandate that transactions between associated enterprises be conducted at arm’s length. The IRD can request contemporaneous documentation, including a Master File and Local File, particularly for significant cross-border transactions.

Common audit focus areas include management fees, royalty payments for intellectual property, and charges for intra-group services. The IRD actively uses third-party comparables and benchmark data to assess whether intercompany pricing is justified.

Turning Compliance into Competitive Advantage

While the new standards increase complexity, they also create opportunities for businesses that strategically align with them. Substance is now a valuable currency.

Leverage Hong Kong’s Treaty Network: With over 45 CDTAs, Hong Kong offers reduced withholding tax rates on dividends, interest, and royalties. Properly documenting your entity’s eligibility as a Hong Kong “resident” under these treaties is more critical than ever.

Explore Incentives for Real Activity: Hong Kong offers tax deductions for qualifying R&D expenditure. Building substantive R&D, management, or trading teams in Hong Kong not only meets substance requirements but can also directly reduce your Profits Tax liability.

Hong Kong’s tax landscape is evolving from one of simple rates to one of verified substance. For multinationals, the strategic imperative is clear: integrate tax compliance into core business planning. The companies that thrive will be those that view these new standards not as a burden, but as a framework to build a more resilient, transparent, and ultimately sustainable operation in Asia’s premier international business hub.