Is your Hong Kong business prepared for the seismic shifts in global tax compliance? The OECD’s BEPS 2.0 initiative has fundamentally reshaped international tax rules, and Hong Kong has responded with sweeping changes that affect everything from transfer pricing to digital services taxation. With Pillar Two now in effect and enhanced disclosure requirements in full force, understanding these changes isn’t just about compliance—it’s about strategic positioning in a transformed global landscape.

BEPS 2.0: Hong Kong’s Strategic Alignment with Global Standards

Hong Kong has strategically positioned itself at the forefront of global tax reform, implementing the OECD’s BEPS 2.0 framework through a phased approach that balances international compliance with business competitiveness. The city’s response centers on two critical pillars that are reshaping corporate taxation worldwide.

Pillar Two: The 15% Global Minimum Tax

Hong Kong enacted its Pillar Two legislation on June 6, 2025, with effect from January 1, 2025. This establishes a 15% global minimum effective tax rate that applies to multinational enterprise (MNE) groups with consolidated revenue of €750 million or more. The framework includes:

• Income Inclusion Rule (IIR): Requires ultimate parent entities to pay top-up tax on low-taxed income of constituent entities
• Hong Kong Minimum Top-up Tax (HKMTT): Ensures Hong Kong collects the top-up tax rather than ceding it to other jurisdictions
• Qualified Domestic Minimum Top-up Tax (QDMTT): Allows Hong Kong to impose domestic minimum tax on in-scope MNEs

Foreign-Sourced Income Exemption (FSIE) Regime

Hong Kong’s FSIE regime represents a critical component of its BEPS alignment, implemented in two phases:

Transfer Pricing Overhaul: Documentation and Substance Requirements

Hong Kong’s transfer pricing regime has undergone a comprehensive transformation, moving from a principles-based approach to a detailed documentation framework aligned with OECD BEPS Action 13. The new requirements place significant compliance burdens on MNEs but provide clearer guidelines for defensible transfer pricing positions.

Three-Tier Documentation Framework

Hong Kong now requires a comprehensive three-tier documentation approach for MNEs:

1. Country-by-Country (CbC) Reporting: Required for MNE groups with consolidated revenue ≥ €750 million. Must be filed within 12 months of the fiscal year-end, providing global allocation of income, taxes, and economic activity.
2. Master File: Provides high-level overview of the MNE group’s global business operations, organizational structure, transfer pricing policies, and value chain analysis.
3. Local File: Detailed documentation specific to Hong Kong entities, covering material related-party transactions, functional analysis, and transfer pricing methodology justification.

Economic Substance: The New Compliance Imperative

The principle of “substance over form” has become central to Hong Kong’s transfer pricing enforcement. Tax authorities now rigorously examine whether:

• Key functions are performed where profits are reported
• Risks are controlled by entities bearing those risks
• Assets are owned by entities that genuinely develop and maintain them
• Personnel and decision-making align with profit allocation

Digital Economy Taxation: Adapting to New Realities

The digital economy presents unique challenges for traditional tax rules based on physical presence. Hong Kong’s BEPS alignment addresses these through updated approaches to permanent establishment and value creation.

Enhanced Disclosure and Anti-Avoidance Measures

BEPS implementation has significantly increased transparency requirements for MNEs operating in Hong Kong. These measures are designed to provide tax authorities with comprehensive visibility into global operations and prevent artificial profit shifting.

Controlled Foreign Corporation (CFC) Rules

Hong Kong’s updated CFC rules aim to prevent passive income shifting to low-tax jurisdictions. Key features include:

• Applies to foreign subsidiaries controlled by Hong Kong companies
• Targets passive income (interest, royalties, certain dividends, financial asset income)
• Includes carve-outs and thresholds aligned with international standards
• Requires substance analysis of foreign entities

Dispute Resolution Mechanisms

With increased complexity comes greater potential for disputes. Hong Kong has enhanced its dispute resolution framework:

Technology Requirements for BEPS Compliance

Meeting BEPS compliance demands requires sophisticated technology infrastructure. The volume, complexity, and frequency of reporting necessitate robust systems for:

• Data Integration: Seamless extraction from ERP, financial, and operational systems
• Advanced Analytics: AI and machine learning for transaction analysis and risk detection
• Extended Retention: 7-year data storage with secure archiving and easy retrieval
• Process Automation: Automated compliance checks and reporting workflows

Strategic Positioning in the Post-BEPS Era

BEPS compliance requires more than just checking boxes—it demands strategic repositioning of business operations and tax structures. Companies must focus on three key areas:

1. Holding Company Substance Enhancement

Passive holding structures without genuine economic activity face increased scrutiny. Companies must demonstrate:

• Adequate local personnel with relevant expertise
• Physical presence and operational capabilities
• Active management and decision-making functions
• Alignment between legal ownership and economic substance

2. Intangible Asset Management

The DEMPE framework (Development, Enhancement, Maintenance, Protection, Exploitation) now governs intangible asset taxation. Companies must:

1. Identify where DEMPE functions actually occur within the group
2. Document costs, risks, and contributions of each entity
3. Align profit allocations with economic contributions
4. Ensure contracts reflect operational realities

3. Supply Chain Profit Allocation

Traditional profit splits may no longer withstand scrutiny. Companies need detailed functional and risk analysis to:

• Map value creation at each supply chain stage
• Align transfer pricing methods with functional profiles
• Identify and address potential challenge areas
• Develop defensible, sustainable pricing policies

The BEPS era represents both challenge and opportunity for Hong Kong businesses. While compliance requirements have increased significantly, companies that proactively align their operations with substance requirements and value creation principles can build more robust, defensible tax positions. The key is moving beyond mere compliance to strategic tax management that supports sustainable business growth in a transformed global landscape. Regular review of structures, documentation, and substance alignment is no longer optional—it’s essential for long-term success.