For decades, Hong Kong’s low, simple tax regime has been a magnet for entrepreneurs. But the landscape is shifting. With the OECD’s 15% global minimum tax now law and international pressure mounting, how can SMEs ensure their tax strategy is robust enough for tomorrow’s challenges? This isn’t just about compliance—it’s about building a resilient, future-proof business in a city whose fiscal rules are evolving in real-time.

The Global Minimum Tax: What It Really Means for Hong Kong SMEs

Hong Kong formally enacted the Global Minimum Tax (Pillar Two) on June 6, 2025, with effect from January 1, 2025. The rules apply a 15% minimum effective tax rate to multinational enterprise (MNE) groups with consolidated global revenue of €750 million or more. While this directly targets large corporations, the ripple effects will touch the entire ecosystem.

SMEs operating across borders, especially those with subsidiaries in traditional low-tax jurisdictions, are already under greater scrutiny. The IRD’s enhanced focus, aligned with OECD Base Erosion and Profit Shifting (BEPS) standards, means that intercompany transactions must be commercially justified and properly documented.

Actionable Insight: A Three-Year Strategic Roadmap

Beyond Profits Tax: Other Critical Reform Fronts

While corporate tax gets attention, SMEs must monitor other evolving areas that could impact cash flow and operational costs.

1. The Foreign-Sourced Income Exemption (FSIE) Regime

Expanded in January 2024, the FSIE regime taxes foreign-sourced dividends, interest, disposal gains, and IP income received in Hong Kong unless the taxpayer meets specific economic substance requirements. For SMEs holding overseas investments or receiving royalties, proving that core income-generating activities are conducted by adequate personnel in Hong Kong is critical to claiming exemption.

2. Stamp Duty: Understanding What Changed

A major shift occurred on 28 February 2024, with the abolition of all additional ad valorem stamp duties on property transactions. This means the Special Stamp Duty (SSD), Buyer’s Stamp Duty (BSD), and New Residential Stamp Duty (NRSD) no longer apply.

3. Capital Gains Tax: A Persistent Question

Hong Kong does not tax capital gains. This remains a cornerstone of its competitiveness. However, SMEs must be meticulous in distinguishing between capital gains (non-taxable) and trading profits (taxable). The IRD will look at factors like frequency of transactions, intention at acquisition, and financing method. Clear documentation of investment intent is vital.

Case Study: Reclaiming a Tax Advantage Through Substance

A manufacturing SME with HK$120 million in revenue sourced goods from a related factory in Mainland China. It claimed its trading profits were offshore and not taxable in Hong Kong. The IRD challenged this, arguing the company lacked substance. The firm faced a substantial reassessment.

Their solution:

• Established a formal Hong Kong office with a dedicated trading team.
• Commissioned a transfer pricing report to justify an arm’s length markup on factory costs.
• Held board meetings in Hong Kong with signed minutes showing strategic decisions were made locally.

Result: The IRD accepted the enhanced substance, reinstating the offshore claim and securing a significantly lower effective tax rate. The lesson is clear: substance must be real, documented, and aligned with commercial activity.

The New Compliance Reality for All Businesses

The era of “light-touch” compliance is over. The Companies Ordinance mandates all businesses maintain “adequate accounting records” accessible in Hong Kong for at least 7 years. Common pitfalls for SMEs include:

• Late Filing: Failure to submit Profits Tax returns can lead to estimated assessments, often higher than the actual liability.
• Vague Descriptions: Labeling income vaguely as “other receipts” can trigger a full-scope audit.
• Payroll Oversights: Incorrect or late filing of Employer’s Returns can complicate visa renewals for key staff.

Hong Kong’s tax system is evolving from simplicity towards sophisticated, internationally-aligned rules. For SMEs, this transition presents both risk and opportunity. By building a tax strategy grounded in real substance, robust documentation, and proactive planning, businesses can not only ensure compliance but also secure a durable competitive advantage in Asia’s dynamic marketplace.