Is your multinational business prepared for Hong Kong’s biggest tax transformation in decades? The global BEPS (Base Erosion and Profit Shifting) initiative has fundamentally reshaped Hong Kong’s tax landscape, moving the territory from its traditional territorial system to a complex international compliance framework. With Pillar Two now law and enforcement intensifying, understanding these changes isn’t just about compliance—it’s about strategic survival in the new era of global tax transparency.

Understanding BEPS and Its Impact on Hong Kong

The Base Erosion and Profit Shifting (BEPS) initiative, developed by the OECD and G20, represents one of the most significant international tax reforms in recent history. For Hong Kong, a jurisdiction long recognized for its territorial tax system and business-friendly environment, BEPS implementation has brought substantial changes to tax compliance, reporting obligations, and audit procedures.

The BEPS 2.0 framework, particularly Pillar Two’s global minimum tax, marks a paradigm shift in how Hong Kong taxes multinational enterprises. On June 6, 2025, Hong Kong enacted the Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Ordinance 2025, implementing a 15% global minimum tax that applies retrospectively to fiscal years beginning on or after January 1, 2025.

Pillar Two: Global Minimum Tax in Hong Kong

Legislative Framework and Scope

The global minimum tax regime applies to multinational enterprise (MNE) groups with annual consolidated revenue of EUR 750 million or above in at least two of the four fiscal years immediately preceding the current fiscal year. This represents a fundamental departure from Hong Kong’s traditional territorial tax approach.

Key Mechanisms

Safe Harbors and Simplifications

To reduce compliance burden, Hong Kong has implemented several OECD-approved safe harbors:

• Transitional CbCR Safe Harbour: Relieves in-scope MNE groups from full GloBE calculations when certain CbC reporting conditions are met
• Transitional UTPR Safe Harbour: Temporary relief from UTPR calculations during initial implementation phase
• Qualified Domestic Minimum Top-up Tax (QDMTT) Safe Harbour: Simplifies compliance for jurisdictions with qualifying domestic minimum taxes
• Simplified Calculations for Non-material Entities: Reduced calculation requirements for constituent entities below materiality thresholds

Country-by-Country Reporting Requirements

Applicability and Thresholds

Hong Kong’s CbCR requirements apply to MNE groups with consolidated annual revenue of at least HKD 6.8 billion (approximately EUR 750 million) that have constituent entities or operations in two or more jurisdictions.

The filing obligation applies to reporting fiscal years commencing on or after January 1, 2018, with Hong Kong actively exchanging CbC reports with approximately 120 jurisdictions through bilateral exchange agreements.

Filing Obligations and Timelines

Penalties for Non-Compliance

Failure to comply with Hong Kong’s CbCR requirements carries significant penalties:

• Initial non-compliance: Fines up to HKD 50,000 for failure to submit or inaccurate reporting
• Persistent non-compliance: Additional penalties up to HKD 100,000 following court order
• Increased scrutiny: Non-compliance triggers enhanced IRD audit attention and potential transfer pricing investigations

Transfer Pricing Documentation: The Three-Tiered Approach

Overview and Requirements

Hong Kong’s transfer pricing regime mandates a three-tiered standardized documentation approach aligned with OECD BEPS Action 13 guidelines. This framework requires entities to articulate and execute consistent transfer pricing policies while providing the IRD with comprehensive information for assessing transfer pricing risks.

Exemptions from Documentation Requirements

A Hong Kong entity satisfying any two of the following conditions is exempt from preparing Master File and Local File:

If the business size exemption does not apply, a further exemption exists based on controlled transaction volumes:

• Property transfers: Not exceeding HKD 220 million (excluding financial assets and intangibles)
• Financial assets: Not exceeding HKD 110 million
• Intangibles transfers: Not exceeding HKD 110 million
• Other transactions: Not exceeding HKD 44 million (services, royalties, etc.)

Timing and Language Requirements

The Master File and Local File must be:

• Prepared within 9 months after the end of the entity’s accounting period
• Retained for no less than 7 years after the end of the accounting period
• Prepared in English or Chinese
• Submitted to the IRD within 1 month of a request (via Form IR1475)

The Foreign-Sourced Income Exemption (FSIE) Regime

Background and EU Compliance

Hong Kong’s inclusion on the EU’s grey list of non-cooperative jurisdictions in October 2021 prompted the implementation of the FSIE regime. The Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022, enacted on December 23, 2022, established the framework effective from January 1, 2023.

On February 20, 2024, Hong Kong was successfully removed from the EU watchlist, confirming that the jurisdiction fulfilled its commitments to strengthening tax good governance standards.

FSIE 1.0 and FSIE 2.0

FSIE 1.0 (effective January 1, 2023) covers:

• Foreign-sourced dividends
• Foreign-sourced interest
• Income from intellectual property (IP income)
• Gains from disposal of equity interests

FSIE 2.0 (effective January 1, 2024) expanded coverage to include:

• Foreign-sourced disposal gains on assets other than equity interests

Economic Substance and Nexus Requirements

Changing Audit Focus and IRD Enforcement Trends

Intensified Transfer Pricing Scrutiny

The IRD has significantly increased its focus on transfer pricing compliance in 2025. Key enforcement trends include:

• Larger scale audits: The IRD is conducting transfer pricing reviews and audits on a more regular basis and broader scale
• Form IR1475 requests: The IRD frequently requests taxpayers to submit Form IR1475, which summarizes key transfer pricing information from Master File and Local File
• One-month deadline: Form IR1475 must be submitted within one month of IRD request
• Severe penalties: Failure to submit IR1475 or inclusion of errors can lead to prosecution and fines up to HKD 100,000, plus potential tax adjustments

Mandatory E-Filing Requirements

As part of Hong Kong’s tax digitalization journey, the IRD has implemented mandatory e-filing requirements:

• Phase 1: Entities of in-scope MNE groups must e-file profits tax returns for years of assessment beginning on or after April 1, 2025 (2025/26 onwards)
• GloBE Information Return (GIR): In-scope groups must identify the designated filing entity and jurisdiction providing the GIR to Hong Kong
• Electronic submission: All CbC reports must be filed electronically via the IRD’s CbCR Portal using OECD XML schema

BEPS Compliance Measures: Summary Table

Practical Compliance Strategies

For Large Multinational Enterprises

MNEs with revenue exceeding EUR 750 million should implement comprehensive compliance frameworks addressing:

1. Pillar Two readiness: Assess ETR calculations, identify low-taxed jurisdictions, evaluate HKMTT exposure
2. GIR preparation: Identify designated filing entities, coordinate with group tax function, ensure data collection processes
3. CbCR compliance: Maintain robust data collection systems, ensure timely filing, coordinate with tax authorities across jurisdictions
4. Transfer pricing documentation: Prepare comprehensive Master File and Local File, update annually, maintain contemporaneous documentation
5. Safe harbor analysis: Evaluate eligibility for transitional and permanent safe harbors to reduce compliance burden

For Mid-Size Enterprises

Entities approaching but not exceeding thresholds should:

• Monitor revenue growth: Track consolidated group revenue relative to EUR 750 million threshold
• Prepare for documentation: Implement transfer pricing policies and documentation processes before reaching thresholds
• Assess controlled transactions: Evaluate volumes of related party transactions against exemption thresholds
• Maintain arm’s length pricing: Ensure compliance with Transfer Pricing Rule 1 regardless of documentation exemptions

Advance Preparation for IRD Audits

Given intensified IRD enforcement, entities should proactively:

• Maintain contemporaneous documentation: Prepare transfer pricing documentation at time of transaction, not retrospectively
• Conduct annual reviews: Update Master File and Local File annually, reassess functional analysis
• Prepare Form IR1475: Maintain summary information readily available for IRD requests
• Consider APAs: Evaluate bilateral or multilateral APAs for significant related party transactions
• Engage professionals: Work with experienced transfer pricing advisors and tax counsel