Is your multinational enterprise prepared for Hong Kong’s most significant tax reform in decades? With the enactment of BEPS 2.0 Pillar Two legislation on June 6, 2025, Hong Kong has fundamentally transformed its tax landscape, implementing a 15% global minimum tax that affects multinational enterprise groups with substantial revenue. This seismic shift requires immediate attention from businesses operating in or through Hong Kong, as compliance deadlines are already approaching for calendar year-end groups.

Understanding BEPS 2.0: The Two-Pillar Framework

The OECD’s Base Erosion and Profit Shifting (BEPS) 2.0 initiative represents a global effort to ensure multinational enterprises pay their fair share of tax. While Pillar One focuses on reallocating taxing rights to market jurisdictions (not yet implemented in Hong Kong), Pillar Two establishes a 15% global minimum effective tax rate that is now law in Hong Kong.

Pillar Two: Global Minimum Tax Now in Effect

Hong Kong’s Pillar Two implementation operates through three interconnected rules, though only two are currently active:

• Hong Kong Minimum Top-up Tax (HKMTT): A qualified domestic minimum top-up tax that allows Hong Kong to collect top-up tax on its low-taxed constituent entities before other jurisdictions
• Income Inclusion Rule (IIR): Allows the ultimate parent entity’s jurisdiction to collect top-up tax on low-taxed foreign subsidiaries
• Undertaxed Profits Rule (UTPR): A backstop mechanism that allocates remaining top-up tax among jurisdictions where the MNE operates (not yet implemented in Hong Kong)

Who is Affected? Scope and Applicability

The Hong Kong legislation applies to MNE groups meeting the revenue threshold test: consolidated annual revenue of €750 million or more in at least two of the four fiscal years immediately preceding the current fiscal year. This threshold is denominated in Euros, not Hong Kong dollars, aligning with global GloBE rules.

In-Scope Entities

• All Hong Kong resident entities of qualifying MNE groups, regardless of whether the group is headquartered in Hong Kong or abroad
• Entities incorporated or constituted in Hong Kong
• Entities normally managed or controlled in Hong Kong (with retrospective effect from January 1, 2024 for definition purposes)
• Constituent entities included or that would have been included in the group’s consolidated financial statements

Excluded Entities

• Government entities and international organizations
• Non-profit organizations and pension funds
• Investment funds and real estate funds serving as ultimate parent entities
• Investment entities and insurance investment entities (to preserve tax neutrality)

The Hong Kong Minimum Top-up Tax (HKMTT): Strategic Design

The HKMTT represents Hong Kong’s strategic implementation choice—designed to meet Qualified Domestic Minimum Top-up Tax (QDMTT) requirements under the GloBE rules. This design has significant implications for affected businesses:

The HKMTT imposes top-up tax equal to the difference between the 15% minimum rate and the effective tax rate (ETR) of the MNE group’s Hong Kong operations, calculated on a jurisdictional basis. This applies to “excess profits”—essentially the profit base after certain adjustments.

Critical Compliance Timeline and Deadlines

Mandatory E-Filing Requirements

Beginning with the year of assessment 2025/26, all constituent entities of in-scope MNE groups must electronically file their profits tax returns. This represents a significant operational change requiring:

• Registration for the Inland Revenue Department’s Business Tax Portal (BTP)
• Identification of all Hong Kong group entities subject to e-filing requirements
• Opting to receive electronic notices and documents in the BTP Business Accounts
• Internal process adjustments to accommodate electronic filing workflows

Safe Harbours: Reducing Compliance Burden

Hong Kong has incorporated all four safe harbour mechanisms provided under the OECD’s GloBE rules. These provisions can significantly reduce compliance costs for eligible groups:

1. Transitional Country-by-Country Reporting (CbCR) Safe Harbour

2. QDMTT Safe Harbour (Permanent)

When an MNE group is subject to a qualifying QDMTT in a jurisdiction, the jurisdictional top-up tax under the GloBE rules is deemed to be zero. Since Hong Kong’s HKMTT is designed to qualify as a QDMTT, Hong Kong constituent entities generally only need to perform HKMTT calculations without additional GloBE calculations for Hong Kong operations.

Strategic Impact Assessment for Hong Kong Businesses

MNE groups with Hong Kong operations should undertake comprehensive impact assessments addressing several key areas:

1. Scope Determination: Confirm whether the group meets the €750 million revenue threshold using the two-out-of-four-years test. Identify all Hong Kong constituent entities, including those managed or controlled in Hong Kong even if incorporated elsewhere.
2. Effective Tax Rate Analysis: Calculate the jurisdictional ETR for Hong Kong operations under GloBE rules methodology. Identify factors that may reduce the ETR below 15%, such as tax incentives, accelerated depreciation, or timing differences.
3. Safe Harbour Eligibility: Evaluate eligibility for transitional CbCR safe harbour, particularly the simplified ETR test. Assess whether Hong Kong operations meet de minimis thresholds.
4. Substance Requirements: Review substance-based income exclusion calculations, which reduce the tax base based on payroll and tangible assets. Consider whether increasing Hong Kong substance might reduce top-up tax exposure.

Preservation of Hong Kong’s Territorial Tax System

The Hong Kong government has explicitly affirmed that the territorial source principle of taxation continues to apply outside the Pillar Two context. This creates a dual-track system:

• For entities outside Pillar Two scope: The traditional territorial system remains fully intact. Only Hong Kong-sourced profits are taxable, and the full range of existing exemptions continue to apply.
• For in-scope MNE groups: While the territorial system still governs standard profits tax, the additional HKMTT and IIR obligations apply based on global income allocation under GloBE rules.

Industry-Specific Considerations

Financial Services

Financial institutions face unique considerations under Pillar Two, including specific exclusions for certain investment and insurance entities, complex calculations for entities with both excluded and non-excluded activities, and interaction with existing financial services tax regimes.

Technology and Intellectual Property

Technology companies and IP-rich businesses should consider the impact on IP holding structures and licensing arrangements, treatment of R&D incentives and credits under GloBE rules, and substance requirements for IP management functions.

Action Steps for Compliance

Immediate Actions (Already Overdue for Some Groups)

1. Respond to IRD communications: If your group received an IRD letter requesting information about Pillar Two applicability, respond by the specified deadline
2. Register for group/JV codes: Apply for necessary identification codes for the group and joint venture entities
3. Confirm in-scope status: Perform the revenue threshold test and definitively determine whether your group is in scope
4. Identify Hong Kong constituent entities: Create a complete inventory of all entities that are Hong Kong residents under the Pillar Two definition

2025-2026 Priorities

1. Prepare first notification: Gather data and prepare the top-up tax notification due within 6 months of the first fiscal year end
2. Perform GloBE calculations: Calculate the effective tax rate for Hong Kong operations and determine whether top-up tax is due
3. Assess safe harbour eligibility: Determine whether transitional safe harbours eliminate or reduce compliance requirements
4. Implement e-filing: Register for the Business Tax Portal and prepare for mandatory electronic filing

Hong Kong’s implementation of BEPS 2.0 Pillar Two represents a fundamental shift in the territory’s tax landscape. While the traditional territorial system remains for smaller businesses, large multinational enterprises must now navigate a complex new compliance framework. The strategic design of Hong Kong’s HKMTT as a QDMTT provides some advantages, but the compliance burden is substantial. Affected businesses should act immediately to assess their position, prepare for upcoming deadlines, and develop strategies to optimize their Pillar Two outcomes while maintaining operational efficiency.