Imagine a multinational company headquartered in Hong Kong, enjoying an effective tax rate of 11% through legitimate incentives. Starting in 2025, its parent company in Europe may be required to pay an extra 4% in tax to its home government, simply because Hong Kong’s rate fell below the new global standard. This is the reality of the OECD’s BEPS 2.0 Pillar Two framework. For decades, Hong Kong’s simple, low-tax territorial system has been a cornerstone of its competitiveness. The global minimum tax doesn’t erase that advantage, but it fundamentally reshapes the rules of the game. For business leaders, the question is no longer if this change matters, but how to strategically adapt to preserve value in a new era of tax transparency.

Understanding the Global Minimum Tax: Pillar Two in Plain English

The OECD’s Base Erosion and Profit Shifting (BEPS) 2.0 project aims to ensure large multinational enterprises (MNEs) pay a fair share of tax wherever they operate. Its most impactful component for Hong Kong is Pillar Two, which introduces a global minimum corporate tax rate of 15%. Hong Kong has formally enacted this framework, with the Inland Revenue (Amendment) (Taxation on Certain Foreign-sourced Disposal Gains) Ordinance 2024 taking effect from January 1, 2025.

Who Is Affected?

The rules primarily target large multinational enterprise (MNE) groups with consolidated annual revenue of €750 million or more in at least two of the previous four fiscal years. This means many Hong Kong-headquartered groups and the local subsidiaries of large foreign MNEs will need to comply.

Hong Kong’s Strategic Position: Adaptation, Not Overhaul

Contrary to some speculation, the global minimum tax does not force Hong Kong to abandon its territorial source principle or its low, simple tax rates. Instead, the government’s strategy is one of sophisticated adaptation:

• Preserving Revenue: The domestic HKMTT ensures that if a top-up tax is due on Hong Kong profits, it is collected by the IRD, not a foreign tax authority.
• Maintaining Fundamentals: The system continues to tax only Hong Kong-sourced profits. There is still no tax on capital gains, dividends, or interest for most businesses.
• Competing on Substance: The focus shifts further towards Hong Kong’s real advantages: the rule of law, a robust financial ecosystem, and unparalleled access to mainland China markets.

The Critical Role of “Substance”

The BEPS era elevates the importance of real economic activity. This aligns with Hong Kong’s recent policy developments, such as the Foreign-Sourced Income Exemption (FSIE) regime and the Family Investment Holding Vehicle (FIHV) regime. Both require adequate levels of staff, expenditure, and decision-making in Hong Kong to qualify for preferential tax treatment (0% for FIHVs). For MNEs, demonstrating real substance in Hong Kong is now crucial for both Pillar Two calculations and defending transfer pricing arrangements.

Action Plan for Hong Kong Businesses

For in-scope groups, compliance will be complex. For all businesses, strategic planning is essential. Here is a practical action plan:

The introduction of the global minimum tax marks the end of an era defined solely by rate competition. For Hong Kong, the next chapter is about leveraging its unparalleled strengths—legal certainty, financial infrastructure, and gateway status—within a new, transparent global framework. Businesses that move beyond mere compliance to strategically align their operations with this reality will be best positioned to thrive. Hong Kong’s value proposition is evolving, not diminishing.