BEPS Pillar Two legislation came into effect in Hong Kong

Overview

On 6 June 2025, Hong Kong enacted legislation to implement the Pillar Two rules of the OECD BEPS 2.0 initiative (GloBE rules), with both the Income Inclusion Rule (IIR) and Hong Kong Minimum Top-Up Tax (HKMTT) effective for fiscal years beginning on or after 1 January 2025 and the Undertaxed Profits Rule (UTPR) to be implemented at a later stage.

 

Steps to be taken

Given the enactment of the Pillar Two legislation in Hong Kong, taxpayers are encouraged to take the following actions:

1. Assess whether you are under the scope of the Pillar Two rules

Multinational enterprise (MNE) groups with annual consolidated revenue of at least EUR750 million in two or more of the preceding four fiscal years are within the scope of the Pillar Two rules.

Certain entities are excluded, including government entities, international organisations, non-profit organisations, pension funds, and investment or real estate funds that are the ultimate parent entities of the group.

2. Familiarise yourselves with the charging mechanisms

IIR – the primary mechanism

The IIR is the primary mechanism, which requires the ultimate parent entity (UPE) of an MNE group to pay a top-up tax if the group’s effective tax rate (ETR) in any jurisdiction falls below the minimum rate of 15%.

Under the IIR, a top-up tax is applied to certain parent entities of MNE groups. This includes:

• UPEs of Hong Kong-headquartered MNE groups;
• Hong Kong intermediate parent entities of foreign-headquartered MNE groups, if the UPEs are in jurisdictions that do not implement IIR; and
• Hong Kong partially-owned parent entities of MNE groups, regardless of whether the UPEs or intermediate parent entities need to apply IIR.

These parent entities are taxed based on their ownership in the low-taxed entities outside Hong Kong.  

The IIR top-up tax is payable in relation to a fiscal year beginning on or after 1 January 2025.

UTPR – the secondary mechanism

The UTPR acts as a backstop to the IIR.  If the IIR does not fully capture the top-up tax (for example, if the UPE is in a jurisdiction that does not implement the IIR), the UTPR ensures that the remaining top-up tax is collected by other jurisdictions where the MNE operates.

The UTPR top-up tax allocated to Hong Kong is charged on Hong Kong constituent entities (HKCEs) of an in-scope MNE group, based on the respective proportion of the employee headcount and the value of tangible assets, unless the group designates one or more than one HKCE to pay the UTPR top-up tax. 

Currently, there is no indication from the Hong Kong Government on when the UTPR will be implemented in Hong Kong. 

HKMTT – taking priority over IIR and UTPR

The HKMTT imposes a top-up tax on low-taxed entities within MNE groups operating in Hong Kong.  This tax takes priority over the IIR and UTPR.  Investment and insurance investment entities are excluded to maintain their tax neutrality.  Generally, the HKMTT is distributed among HKCEs in an MNE group based on each entity’s GloBE income, unless the group designates one or more than one HKCE to pay the top-up tax.

The HKMTT is designed to meet the qualified domestic minimum top-up tax (QDMTT) requirements under the GloBE rules, ensuring that the top-up tax paid under HKMTT can be credited against the GloBE rules’ top-up tax.

The HKMTT is payable in relation to a fiscal year beginning on or after 1 January 2025.

3. Consider whether you fall within any transitional or permanent safe harbours

In-scope taxpayers who satisfy certain safe harbours will be relieved from performing full GloBE calculations:

• Transitional Country-by-Country (CbC) Reporting Safe Harbour: This transitional measure operates through the use of simplified jurisdictional revenue and income information contained in the MNE’s qualified CbC report and jurisdictional tax information contained in the qualified financial statements for any fiscal years beginning on or before 31 December 2026 (but not including a fiscal year that ends after 30 June 2028).  The GloBE top-up tax payable by the group in Hong Kong will be deemed to be zero if the group can meet certain tests, such as the de minimis test, routine profits test, or ETR test.

• Permanent QDMTT Safe Harbour: The HKMTT is intended to qualify as a QDMTT and be eligible for the QDMTT safe harbour. Subject to certain disqualifying conditions, in-scope MNE groups that are subject to the HKMTT can benefit from the QDMTT Safe Harbour, which allows the group to undertake only one QDMTT calculation and the GloBE top-up tax payable by the group in Hong Kong will be deemed to be zero.

• Permanent Simplified Calculations Safe Harbour: Instead of performing detailed calculations, MNE groups can use simplified income, revenue, and tax calculations for its non-material constituent entities. The GloBE top-up tax payable by the group in Hong Kong will be deemed to be zero if the group can meet certain tests, such as the de minimis test, routine profits test, or ETR test.

4. Evaluate your current data, processes and systems to see if they can address the relevant compliance requirements

5. Be mindful of the compliance timeline and start to get prepared

• Top-up tax notification: A top-up tax notification must be filed within 6 months of the fiscal year end. This informs the Inland Revenue Department (IRD) that the group is within the scope of the GloBE rules and HKMTT, and identifies the designated filing entity and the jurisdiction providing the GloBE Information Return (GIR) to Hong Kong. Only one local entity is required to file the notification on behalf of all HKCEs.

• Top-up tax return: A top-up tax return must be filed within 15 months of the fiscal year end (or 18 months for the first transition year). It should include the required GIR details unless they are already submitted in a jurisdiction with an effective exchange agreement with Hong Kong.  One designated HKCE may submit the return on behalf of the group.

For instance, for a fiscal year ending 31 December 2025, the top-up tax notification is due by 30 June 2026 and the return by 31 March 2027.  For the first transition year,  the return filing deadline is extended by 3 months.

6. Assess whether a restructure or new procedures and control system are appropriate and consult tax professionals if needed

 

Other considerations

It is also worth noting that the Hong Kong Government had made some amendments to the draft bill based on the feedback received during the industry consultation.  The key amendments include:

• Time limits: The Hong Kong Government has amended the limitation period for raising top-up tax assessments in non-evasion cases to 8 years, and in evasion-related cases to 12 years. This period runs from the end of the relevant fiscal year, or from the end of March in the following year if the year end is not 31 March.  Taxpayers must retain records for 9 years after completing the relevant transactions.

• Penalty: New penal provisions for non-compliance with the reporting and administrative requirements under the GloBE and HKMTT frameworks have been added in Sections 80O, 82, and 82A of the Inland Revenue Ordinance (Cap. 112) (IRO), including the failure to file required returns or notifications and wrongdoings in relation to incorrect return and notification. Notably, to reduce compliance burden, the proposed penalties for directors, officers, and service providers had been removed.

• Anti-avoidance provisions: A modified Section 61A of the IRO (i.e. the sole or dominant purposes test) applies to GloBE and HKMTT regimes as the general anti-avoidance rule. In determining whether an arrangement was made for the sole or dominant purpose of obtaining a top-up tax benefit, consideration must be given to the impact on the group’s overall tax liability and whether the transaction’s outcome is inconsistent with the GloBE rules.

 

Key takeaway

Given the complexity of the Pillar Two rules, in-scope MNE groups should conduct an impact assessment promptly.  It is advisable to consult with tax advisors to ensure readiness for Pillar Two compliance. 

We anticipate that the IRD will provide further guidance on the practical application of these rules. Taxpayers should stay informed about any updates or developments regarding the implementation of the Pillar Two rules in Hong Kong.  

Please do not hesitate to get in touch with our tax team on this subject matter.