Hong Kong legislation to implement Pillar Two of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) 2.0 initiative was gazetted as law on 6 June 2025. The domestic minimum top-up tax in Hong Kong (HKMTT) and the Income Inclusion Rule (IIR) are retroactively effective from 1 January 2025, while implementation of the Undertaxed Profits Rule is postponed subject to further studies.

Key features of the law

The Hong Kong legislation closely follows OECD model rules as well as related commentaries and guidance. The key features of the law are highlighted below.

With retrospective effect from 1 January 2024, an entity would be considered to be a Hong Kong-resident entity if it is incorporated or constituted in Hong Kong or if it is normally managed or controlled in Hong Kong. This definition is not expected to affect the tax liabilities or other obligations of entities under the existing Hong Kong tax system, as Hong Kong does not impose tax based on an entity's residence. The government also reiterates that the territorial source principle of taxation will continually apply outside the context of Pillar Two.

HKMTT is only applied to in-scope multinational enterprise (MNE) groups with revenue in the consolidated financial statements of the ultimate parent entity equivalent to or more than €750m for at least two years out of four years preceding the fiscal year, except for certain regulated exclusions.

All Hong Kong constituent entities of the MNE group, including those held under joint venture structures, will be subject to the whole amount of the HKMTT irrespective of their ownership interest. Relief is provided to avoid double taxation.

Investment entities and insurance investment entities are excluded from the scope of the HKMTT to preserve tax neutrality for the entities. HKMTT applies to a stateless constituent entity similarly to how HKMTT applies to a Hong Kong constituent entity.

HKMTT is intended to be a Qualified Domestic Minimum Top-up Tax. The local financial accounting standard is adopted to determine the financial accounting net income or loss for HKMTT purposes when conditions are met.

All safe harbors available under the Pillar Two rules are provided to reduce the compliance burden, if conditions are met.

The sole-or-dominant test under existing the general anti-avoidance rule (GAAR) will be applicable if the outcome of an arrangement is considered to constitute avoidance or is considered abusive for Pillar Two purposes under the OECD guidance. Guidance is anticipated indicating that such GAAR will generally not apply to transactions that were entered into on or before 30 November 2021.

Compliance requirements

The Hong Kong government also introduced the following tax compliance and administration approaches for the Pillar Two Rules:

• An annual top-up tax notification should be filed within six months after the end of the fiscal year (i.e., 30 June 2026 for calendar year-end group).
• An annual top-up tax return should be filed within 15 months (extended to 18 months for a transition year) after the end of the fiscal year (i.e., by 31 March 2027 for calendar year-end group that is already subject to the Pillar Two Rules in 2024 in other jurisdictions). Hong Kong constituent entities will be relieved of the obligation to file the information of Global Anti-Base Erosion Information Return (GIR) if the GIR will be exchanged with Hong Kong under a qualifying competent authority agreement.
• A notice of assessment and demand for top-up tax will be issued based on the top-up tax return. No provisional top-up tax will be charged. The top-up tax will generally be due one month after the date of the notice of assessment.
• An MNE group is permitted to appoint one Hong Kong constituent entity to file the top-up tax notification and tax return, and to designate one or more top-up tax-paying entity.
• The existing tax administration mechanisms will apply to the Pillar Two Rules and mutual agreement procedure mechanisms will be available to resolve cross-border disputes on the top-up taxes.
• Penalties will apply in the event of noncompliance, including late or incorrect filing of required notifications and returns.

Implications

Considering the Hong Kong headline profits tax rate at 16.5% and the territorial tax system, MNE groups with a presence in Hong Kong should evaluate the impact of the proposed Pillar Two rules for tax provisioning and compliance. Affected entities should assess applicability of safe harbors, especially the transitional country-by-country safe harbor, as these could reduce the complexity of full calculation and compliance burden.