Hong Kong has made significant progress in its alignment with the OECD’s global tax framework. According to the Asia Transfer Pricing Brief for the second quarter of the fiscal year 2025, the Income Tax Amendment Ordinance (Minimum Tax for Multinational Enterprise Groups), Ordinance 2025 was enacted on June 6, 2025, establishing the Hong Kong Minimum Top-up Tax (HKMTT) and enhancing local Transfer Pricing rules under Pillar Two of the OECD’s global minimum tax.
Global Minimum Tax (Pillar Two) and Tax Top-up Mechanism in Hong Kong
The new regulations establish a minimum effective tax rate of 15% on the profits of multinational groups with consolidated annual revenues equal to or exceeding EUR 750 million. The HKMTT applies to group entities in Hong Kong when the local effective rate is below 15% and is imposed as a priority measure before considering the IIR or UTPR rules.
The rule incorporates three main elements:
- The Income Inclusion Rule (IIR), which may apply if the local rate is below the minimum.
- The Undertaxed Profits Rule (UTPR) applies if the IIR does not conduct a full adjustment in another jurisdiction.
- The Hong Kong Minimum Top-up Tax (HKMTT) applies as a priority measure to address any local tax gaps.
Additionally, “tax residence” applies to entities incorporated in Hong Kong or usually managed therefrom as of January 1, 2024. It has retroactive effects that prevent other jurisdictions from claiming the HKMTT on entities meeting this condition.
Enhancing Tax Control and Transfer Pricing Documentation
Simultaneously, the Inland Revenue Department (IRD) of Hong Kong has intensified its Transfer Pricing reviews. As of 2025, intragroup transactions must be thoroughly reviewed, particularly for compliance with the new global regulations and consistency with the OECD Transfer Pricing Guidelines.
Form IR1475, which summarizes key information from the Master and Local Files, applies upon request by the IRD within one month, with the possibility of a one-month extension if justified. Failure to comply with this obligation may result in penalties of up to HKD 100,000, in addition to corresponding tax adjustments.
In this context, the IRD requires compliance with the Arm’s Length Principle and encourages the use of the Advance Pricing Agreement (APA) program as a preventive tool to mitigate tax disputes.
Documentation Regime: Master File, Local File, and CbCR
According to current regulations (implemented since the tax period commencing April 1, 2018), Hong Kong entities must prepare a Master File, Local File, and, where applicable (multinational groups exceeding EUR 750 million in revenue), a Country-by-Country Report (CbCR).
There are exemptions based on the size of the business, including earnings, assets, and number of employees, as well as the volume of controlled transactions. Conversely, all entities must continue to comply with Rule 1 on Arm’s Length appraisal, even if they are exempt from formal reporting.
Files must be prepared within nine months after the close of the fiscal year, maintained for seven years, and be available for review within six months of tax filing.
Conclusion
The fiscal year 2025 marks a pivotal moment for Hong Kong: Between the adoption of HKMTT and the implementation of stricter Transfer Pricing controls, the tax landscape necessitates enhanced tax governance. Multinational companies should review their TP policies, strengthen their documentation, and consider options like APAs to ensure compliance and certainty for audits.
Source: https://www.ird.gov.hk/eng/tax/bus_beps.htm