Introduction

The enactment of the Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Ordinance 2025 on 6 June 2025 marks a fundamental shift in Hong Kong’s tax landscape. This legislation brings Hong Kong into alignment with the OECD’s Base Erosion and Profit Shifting (BEPS) 2.0 framework, specifically implementing Pillar Two’s Global Anti-Base Erosion (GloBE) rules.

For multinational enterprises operating in or through Hong Kong, this represents the most significant tax reform in recent history. While Hong Kong’s territorial tax system remains intact for entities outside Pillar Two’s scope, affected MNEs must now navigate a complex compliance framework that fundamentally changes how they calculate and report their tax obligations.

Understanding BEPS 2.0: The Two-Pillar Framework

Pillar One: Reallocation of Taxing Rights

Pillar One (Amount A) focuses on reallocating taxing rights to market jurisdictions where economic activities occur, rather than solely where physical presence exists. This pillar targets the largest MNEs with global revenues exceeding €20 billion and profitability above 10% of revenue.

As of December 2025, Hong Kong has not implemented Pillar One Amount A, and the global implementation timeline remains uncertain. The OECD released a multilateral convention framework in October 2023, but widespread adoption is still pending. Hong Kong businesses should monitor developments closely, particularly those in digital services, consumer-facing businesses, and other sectors with significant market presence outside their physical jurisdiction.

Pillar Two: Global Minimum Tax

Pillar Two establishes a 15% global minimum effective tax rate for large MNE groups. Unlike Pillar One’s uncertain timeline, Pillar Two is now law in Hong Kong and multiple other jurisdictions worldwide. The framework operates through three interconnected rules:

• 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)

Hong Kong’s Pillar Two Implementation

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. Importantly, the threshold is denominated in Euros, not Hong Kong dollars, aligning with the global GloBE rules.

In-scope entities include:

• 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 1 January 2024 for definition purposes)
• Constituent entities included or that would have been included in the group’s consolidated financial statements

Excluded entities include:

• Government entities
• International organisations
• Non-profit organisations
• 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)

The HKMTT is Hong Kong’s domestic implementation of the minimum tax, designed to meet QDMTT requirements under the GloBE rules. This strategic design choice has significant implications:

Priority in Tax Collection: As a QDMTT, the HKMTT takes priority over the IIR and UTPR. This means Hong Kong collects the top-up tax on its low-taxed entities first, preventing other jurisdictions from taxing those profits under their IIR or UTPR regimes.

Calculation Methodology: 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. The tax applies to “excess profits”—essentially the profit base after certain adjustments.

QDMTT Safe Harbour: When conditions are met, in-scope MNE groups can benefit from the QDMTT Safe Harbour, which deems the GloBE top-up tax payable in Hong Kong as zero. This significantly reduces compliance burden by eliminating the need for full GloBE calculations for Hong Kong operations.

Implementation Timeline and Key Dates

Compliance Requirements and Filing Obligations

Notification and Return Filing

In-scope MNE groups face two primary filing obligations in Hong Kong:

1. Top-up Tax Notification (Due within 6 months of fiscal year end)

This notification informs the Inland Revenue Department that the group falls within the scope of the GloBE rules and HKMTT. It must identify:

• The designated filing entity for the group
• The jurisdiction providing the GloBE Information Return (GIR) to Hong Kong
• Basic information about the group structure and Hong Kong constituent entities

2. Top-up Tax Return (Due within 15 months of fiscal year end, or 18 months for first transition year)

This return includes detailed calculations of the top-up tax liability and must incorporate GIR details unless already submitted in a jurisdiction with an effective exchange agreement with Hong Kong. Notably, one designated Hong Kong constituent entity may submit the return on behalf of all Hong Kong entities in the group.

Example Timeline for Calendar Year-End Groups:

• Fiscal Year End: 31 December 2025
• Notification Due: 30 June 2026
• First Return Due: 30 June 2027 (18-month extension for first transition year)
• Subsequent Returns Due: 31 March (15 months after fiscal year end)

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 requirement represents a significant operational change for many businesses and requires:

• 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 (for entities without tax representatives, this is required to qualify for a one-month filing extension)
• Internal process adjustments to accommodate electronic filing workflows

Payment Flexibility

The Hong Kong government has provided flexibility in payment administration. MNE groups can designate which Hong Kong entities will handle top-up tax payment each year, and this designation can change annually. The payment deadline is one month after the later of:

• The assessment notice date, or
• The return filing deadline

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 by eliminating or simplifying calculation requirements.

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

Applicability: Fiscal years beginning on or before 31 December 2025 and ending on or before 31 December 2026 (extended to 30 June 2028 in some formulations)

Conditions: Top-up tax in a jurisdiction is deemed to be nil if any of the following tests are met:

Strategic Consideration: Given Hong Kong’s standard corporate tax rate of 16.5%, many Hong Kong operations may qualify for the simplified ETR test, particularly in 2025. However, groups should carefully assess all available incentives, deductions, and the timing of income and expenses, as these can reduce the effective rate below the safe harbour threshold.

2. Transitional UTPR Safe Harbour

Applicability: Transitional period for fiscal years beginning on or before 31 December 2026

Benefit: MNE groups headquartered in jurisdictions with a nominal corporate tax rate of at least 20% (such as the United States) are relieved from certain UTPR obligations in Hong Kong during the transitional period. Since Hong Kong has postponed UTPR implementation indefinitely, this safe harbour’s practical impact is currently limited but remains relevant for long-term planning.

3. QDMTT Safe Harbour

Applicability: Permanent safe harbour (not transitional)

Benefit: 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.

Disqualifying Conditions: This safe harbour does not apply if certain conditions occur, such as material competitive distortions or failure to meet QDMTT requirements. Groups should monitor OECD guidance for evolving standards.

4. Simplified Calculations Safe Harbour for Non-Material Constituent Entities

Applicability: Constituent entities meeting materiality thresholds

Benefit: Allows simplified calculations for entities that are not material to the overall GloBE computation, reducing administrative burden without compromising the integrity of the minimum tax framework.

Strategic Considerations for Hong Kong Businesses

Impact Assessment and Tax Planning

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

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
• Determine which entities qualify for exclusions
• Map the group structure to understand IIR application from parent jurisdictions

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
• Assess the impact of Hong Kong’s two-tier profits tax rates (8.25% for first HK$2 million, 16.5% thereafter) on smaller Hong Kong entities
• Model potential top-up tax liabilities under various scenarios

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
• Confirm HKMTT qualification as a QDMTT to maximize benefits of the QDMTT safe harbour
• Consider restructuring options that might improve safe harbour eligibility

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 (employees, physical assets) might reduce top-up tax exposure
• Balance substance enhancement against business efficiency and costs

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 is crucial for understanding the dual-track nature of Hong Kong’s tax system post-BEPS 2.0:

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 (including the foreign-sourced income exemption for specified foreign-sourced income) 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. This creates a layered compliance framework where entities must navigate both traditional Hong Kong tax principles and new global minimum tax requirements.

Cash Tax vs. Accounting Impact

Financial reporting teams must carefully consider both the cash tax impact (actual payments to the IRD) and financial statement implications under IFRS or other applicable accounting standards. Key considerations include:

• Deferred tax accounting for temporary differences between GloBE calculations and local tax bases
• Disclosure requirements for Pillar Two exposure and liabilities
• Impact on effective tax rate disclosures and tax reconciliations
• Coordination between tax and finance functions to ensure consistent treatment

Cross-Border Planning in Light of IIR

The IIR allows parent jurisdictions to tax low-taxed income of foreign subsidiaries. Hong Kong groups with overseas operations, and foreign groups with Hong Kong subsidiaries, must consider:

• Parent jurisdiction IIR application: If the ultimate parent entity is in a jurisdiction that has implemented the IIR (such as the EU, UK, Japan, Korea, or Australia), low-taxed Hong Kong income may be subject to top-up tax in the parent jurisdiction (unless Hong Kong collects it first via HKMTT)
• Hong Kong IIR on foreign subsidiaries: Hong Kong-headquartered MNEs must apply the IIR to their low-taxed foreign subsidiaries, creating new compliance obligations and potential tax costs
• Intermediate holding company structures: Traditional holding structures may need review, as the IIR can apply at each parent level in the ownership chain
• Joint ventures and minority interests: Special rules apply to joint ventures, with ownership-based allocation of top-up tax

Operational and Systems Readiness

Compliance with Pillar Two requires significant operational infrastructure:

Data Collection and Systems:

• Aggregating financial data from all constituent entities worldwide
• Tracking covered and adjusted taxes in each jurisdiction
• Calculating substance-based income exclusions (requiring payroll and tangible asset data)
• Implementing tax technology solutions capable of performing complex GloBE calculations
• Establishing data governance and quality controls

Process and Governance:

• Defining roles and responsibilities across tax, finance, legal, and IT functions
• Establishing coordination mechanisms between Hong Kong and overseas teams
• Creating approval workflows for elections and designations (e.g., designated filing entity)
• Building institutional knowledge through training and documentation
• Engaging with advisors for technical interpretations and compliance support

E-Filing Infrastructure:

• Registering for IRD’s Business Tax Portal
• Integrating e-filing into existing tax compliance workflows
• Training staff on electronic filing procedures
• Establishing backup and contingency procedures for system failures

Subject to Tax Rule (STTR): A Future Consideration

While not currently part of Hong Kong’s implementation, the Subject to Tax Rule (STTR) is another component of the BEPS 2.0 framework that deserves attention from MNEs with operations in developing jurisdictions.

How STTR Works

The STTR allows developing source jurisdictions to effectively deny treaty benefits on intra-group payments (such as interest, royalties, and certain services fees) if those payments are not taxed at a minimum rate of 9% in the recipient’s jurisdiction. This rule addresses situations where treaty relief results in low or no taxation.

Example: Suppose Hong Kong has a tax treaty with a developing jurisdiction that reduces interest withholding tax from 10% to 5%. If a Hong Kong lender receives interest that is not taxed in Hong Kong (for example, due to the foreign-sourced income exemption), the STTR could allow the source jurisdiction to impose additional withholding tax up to a combined 9% rate. In this scenario, the developing jurisdiction could withhold an additional 4% (bringing the total from 5% to 9%).

Strategic Implications

Although Hong Kong’s consultation paper did not address STTR, MNE groups with significant operations in developing jurisdictions should:

• Monitor STTR implementation in source jurisdictions where they receive passive income or service fees
• Assess exposure to additional withholding taxes on payments currently benefiting from treaty relief
• Consider restructuring arrangements that may trigger STTR, such as moving IP or financing functions to jurisdictions with higher tax rates
• Review transfer pricing policies to ensure arm’s length pricing, as STTR applies after transfer pricing adjustments

Pillar One Status: Monitoring Required

As of December 2025, Pillar One Amount A remains in a state of global uncertainty. The OECD’s multilateral convention framework was released in October 2023, but widespread ratification and implementation have not occurred.

Pillar One would affect only the very largest MNEs (those with global revenue exceeding €20 billion and profitability above 10%). For these companies, Amount A would reallocate a portion of residual profits to market jurisdictions based on revenue sourcing, fundamentally changing where profits are taxed.

Hong Kong Considerations:

• As a market jurisdiction, Hong Kong could gain taxing rights over profits of large MNEs selling into Hong Kong, even without physical presence
• Conversely, Hong Kong-headquartered MNEs exceeding the thresholds would see some profits reallocated to their market jurisdictions worldwide
• The interaction between Amount A and Hong Kong’s territorial system remains to be clarified
• Digital services, consumer goods, and other customer-facing businesses would face the most significant impact

While Pillar One implementation is not imminent, affected MNEs should monitor developments and begin preliminary assessments of potential exposure.

Industry-Specific Considerations

Financial Services

Financial institutions face unique considerations under Pillar Two:

• Specific exclusions for certain investment and insurance entities
• Complex calculations for entities with both excluded and non-excluded activities
• Interaction with existing financial services tax regimes
• Substance requirements for treasury and financing functions

Technology and Intellectual Property

Technology companies and IP-rich businesses should consider:

• Impact on IP holding structures and licensing arrangements
• Treatment of R&D incentives and credits under GloBE rules
• Substance requirements for IP management functions
• Potential Pillar One exposure (for companies exceeding €20 billion revenue threshold)

Manufacturing and Trading

Manufacturing and trading groups face considerations including:

• Impact of supply chain structures on jurisdictional ETR calculations
• Substance-based income exclusion benefits from tangible assets and payroll
• Transfer pricing implications and alignment with GloBE principles
• Regional headquarters functions and service arrangements

Looking Ahead: Future Developments

UTPR Implementation Timeline

While Hong Kong has enacted the IIR and HKMTT effective from 1 January 2025, the UTPR remains unimplemented with no announced timeline. This creates planning uncertainty but also provides time for groups to prepare. Key questions include:

• When will Hong Kong implement the UTPR?
• Will the implementation follow the OECD model rules precisely, or will Hong Kong introduce modifications?
• How will the UTPR interact with Hong Kong’s existing transfer pricing and anti-avoidance rules?

MNE groups should monitor announcements from the Financial Services and Treasury Bureau and Inland Revenue Department for updates on UTPR implementation plans.

OECD Guidance Evolution

The OECD continues to release administrative guidance, safe harbour updates, and technical clarifications on the GloBE rules. Hong Kong has indicated it will follow OECD guidance to maintain consistency with the international framework. Businesses should:

• Monitor OECD publications, particularly Administrative Guidance documents
• Track Hong Kong IRD’s interpretative guidance and Departmental Interpretation and Practice Notes (DIPNs)
• Participate in industry consultations when the Hong Kong government seeks feedback
• Engage with tax authorities proactively on complex or uncertain issues

Potential Amendments and Refinements

As with any major tax reform, amendments and refinements are likely as practical implementation issues emerge. Areas that may see future changes include:

• Safe harbour expansions or modifications based on compliance experience
• Simplifications for particular industries or entity types
• Technical corrections to align with evolving OECD guidance
• Administrative procedures and filing processes based on IRD’s operational experience

Preparing for Compliance: Action Steps

For MNE groups operating in Hong Kong, immediate and ongoing action is required to ensure compliance with the new regime:

Immediate Actions (Already Overdue for Calendar Year-End Groups)

1. Respond to IRD communications: If your group received an IRD letter requesting information about Pillar Two applicability, respond by the specified deadline (November 2025 for many groups)
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 (e.g., 30 June 2026 for calendar year-end groups)
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 of profits tax returns for year of assessment 2025/26
5. Designate filing entity: Choose which Hong Kong entity will serve as the designated filer for the group
6. Coordinate with global tax function: Ensure alignment between Hong Kong compliance and global Pillar Two reporting (particularly GIR preparation)
7. Prepare first return: Complete the comprehensive top-up tax return due within 15-18 months of the first fiscal year end

Ongoing Governance

1. Establish annual compliance calendar: Document all notification, filing, and payment deadlines
2. Build institutional knowledge: Train tax, finance, and legal teams on Pillar Two requirements
3. Monitor developments: Track OECD guidance, Hong Kong legislative updates, and peer jurisdiction implementations
4. Review planning opportunities: Regularly assess whether structural or operational changes could optimize the Pillar Two position
5. Engage advisors: Maintain relationships with tax advisors specializing in Pillar Two for complex technical issues