For decades, Hong Kong’s simple, low-tax regime has been a cornerstone of its appeal to global business. But what happens when the world agrees to a new set of rules? The OECD’s Global Minimum Tax, known as Pillar Two, is now a reality in Hong Kong. This isn’t just another compliance update—it’s a fundamental shift that redefines the playing field for large multinationals. If your group’s revenue exceeds €750 million, the question is no longer if this affects you, but how. This guide cuts through the complexity to explain what Hong Kong’s new law means for your corporate strategy.

Hong Kong’s Pillar Two Law: What Has Actually Changed?

Hong Kong formally enacted its Global Minimum Tax legislation—the Inland Revenue (Amendment) (Taxation on Certain Foreign-sourced Disposal Gains) Ordinance 2025—on June 6, 2025, with an effective date of January 1, 2025. This aligns the city with over 140 jurisdictions implementing the OECD’s Two-Pillar solution to combat base erosion and profit shifting (BEPS).

The core objective is straightforward: to ensure large multinational groups pay a minimum level of tax—15%—on the profits arising in each jurisdiction where they operate. Hong Kong’s law implements two key rules:

1. Income Inclusion Rule (IIR): This is the primary “top-up” tax mechanism. If a Hong Kong-based parent company has subsidiaries in low-tax jurisdictions (with an Effective Tax Rate below 15%), the Hong Kong parent must pay the difference to the IRD.
2. Hong Kong Minimum Top-up Tax (HKMTT): This is a crucial domestic rule. It gives Hong Kong the first right to collect any top-up tax on low-taxed profits earned within Hong Kong itself. This prevents that revenue from being collected by another country’s tax authority.

The Effective Tax Rate (ETR): Your New Key Metric

Forget the headline corporate tax rate. Pillar Two operates on the Effective Tax Rate (ETR) calculated for each jurisdiction where your group operates. The ETR is GloBE (Global Anti-Base Erosion) Income divided by Covered Taxes. This calculation uses specific, standardized Pillar Two rules, not local accounting standards.

Strategic Implications for Businesses in Hong Kong

The introduction of the Global Minimum Tax moves competition beyond tax rates. For in-scope MNEs, the focus must shift to substance, operational efficiency, and strategic use of Pillar Two’s carve-outs.

1. The Substance-Based Income Carve-Out: Reward for Real Activity

This is a critical relief mechanism. A percentage of income linked to tangible assets and payroll costs is excluded from the top-up tax calculation. In the initial transition period (2025-2027), this carve-out is 10% of the carrying value of tangible assets plus 10% of payroll costs, reducing to 5% after 2033.

2. Re-evaluating Holding Structures and Incentives

Hong Kong is a popular regional holding company location. Passive holding companies with little substance are most at risk of having low ETRs. Furthermore, while Hong Kong’s existing tax incentives (like the two-tiered Profits Tax rates) remain, their benefit may be neutralized by Pillar Two if they push the ETR below 15%, as the HKMTT would claim the top-up.

3. Compliance and Reporting Burden

In-scope groups will face significant new compliance requirements, including detailed ETR calculations per jurisdiction and the filing of a GloBE Information Return (GIR). The first returns for the 2025 financial year will be due in 2026.

Action Plan for Multinationals

Proactive assessment is essential. Here is a structured approach to navigate the new landscape:

The Global Minimum Tax marks the end of an era defined solely by tax rate competition. For Hong Kong, the challenge is also an opportunity. The city’s future appeal to multinationals will increasingly hinge on its unparalleled connectivity, robust legal system, deep talent pool, and now, its ability to facilitate compliant, substantive operations under a new global standard. The businesses that thrive will be those that view Pillar Two not just as a compliance exercise, but as a catalyst for strategic reinvention.