Understanding the Global Minimum Tax: How OECD Pillar Two Affects Hong Kong Businesses

The global tax landscape is undergoing a transformative shift with the OECD’s Pillar Two reforms, introducing a global minimum tax aimed at curbing profit shifting and promoting fairer tax competition.

Hong Kong, renowned for its low corporate tax rates and investor-friendly climate, is aligning itself with these international standards to safeguard its position as a leading financial hub.

Effective from 1 January 2025, the new rules will apply to multinational enterprise (MNE) groups with consolidated revenues of at least EUR 750 million. This article provides a comprehensive overview of how Hong Kong is implementing the global minimum tax, including its two-tier approach through the Global Anti-Base Erosion (GloBE) rules and the Hong Kong Minimum Top-Up Tax (HKMTT).

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Implementation of the Global Minimum Tax in Hong Kong

Effective Date:
The new rules take effect from 1 January 2025.

Scope:
Applies to MNE groups with consolidated revenues of at least EUR 750 million in at least two of the four preceding years.

Two-Tier Approach:
Hong Kong will adopt the Global Anti-Base Erosion (GloBE) rules and a Hong Kong Minimum Top-Up Tax (HKMTT) to ensure compliance with the OECD framework.

Legislative Compliance:
The Hong Kong Inland Revenue Department (IRD) has released draft legislation aligning with OECD guidelines to minimise the impact on Hong Kong’s economic competitiveness.

Hong Kong’s Strategic Approach to Implementing OECD Pillar Two

Hong Kong has adopted a pragmatic, business-friendly approach to implementing OECD Pillar Two, balancing global compliance with its commitment to maintaining a competitive tax environment.

Key elements of Hong Kong’s strategy include:

• Gradual Implementation & Transitional Reliefs:
  Hong Kong is introducing the rules with a phased timeline, taking effect from 1 January 2025, and providing transitional reliefs to allow multinational enterprises (MNEs) ample time to adapt.
• Streamlined Compliance Procedures:
  The IRD has incorporated simplified filing obligations into the draft legislation. Smaller constituent entities within MNE groups will face fewer administrative hurdles, easing the reporting process.
• Special Treatment for Joint Ventures:
  Recognising the complexities joint ventures may face under Pillar Two, the legislation includes specific provisions to simplify compliance for these structures.
• Transitional Safe Harbours:
  Temporary safe harbour rules are being introduced, offering MNEs breathing space to align their internal processes with new requirements without facing immediate penalties.
• Minimised Domestic Impact for Smaller Businesses:
  The HKMTT applies strictly to large MNE groups exceeding the EUR 750 million threshold, ensuring local SMEs and smaller businesses remain unaffected.
• Preserving Existing Tax Incentives:
  Preferential regimes such as Hong Kong’s two-tier profits tax and offshore income exemptions (subject to economic substance requirements) remain intact, safeguarding the city’s attractiveness as a low-tax jurisdiction.
• Targeted Anti-Avoidance Rule:
  A new “main purposes test” anti-avoidance rule has been introduced, applying a lower threshold than previous rules. This aims to prevent aggressive tax planning without overburdening compliant businesses.

Collaboration with Industry Stakeholders:

The IRD has actively engaged with tax professionals, industry bodies, and multinational corporations to ensure the legislation reflects practical business needs while adhering to OECD standards.

How the Global Minimum Tax Will Impact Businesses in Hong Kong

The introduction of the global minimum tax marks a pivotal shift for multinational enterprises (MNEs) operating in Hong Kong. Businesses accustomed to the city’s traditionally low tax environment will need to recalibrate their strategies to comply with the new 15% minimum effective tax rate.

Key Implications for Businesses:

1. Increased Tax Liabilities:
   Companies currently enjoying a lower effective tax rate in Hong Kong may face higher overall tax obligations, directly impacting profitability and financial planning. This is particularly significant for groups subject to the global minimum tax threshold.
2. Compliance Complexity:
   The new rules require enhanced tax reporting, jurisdictional effective tax rates calculation, and reconciliation across multiple countries. Businesses will need robust internal systems and expertise to handle these additional layers of compliance.
3. Administrative & Operational Costs:
   To meet the compliance obligations under Pillar Two, companies may need to invest in new technology, hire specialised tax professionals, and engage external advisors—adding to operational costs and resource allocation pressures.
   
   Additionally, businesses must ensure their financial systems can extract, cleanse, and organise the granular, entity-level data required by the GloBE rules—data points that may not currently exist within centralised systems. Early coordination across tax, finance, IT, and legal teams will be crucial.
4. Strategic Realignment:
   Existing corporate structures may no longer yield the same tax efficiencies. Businesses may need to rethink profit allocation models, assess the substance of operations in each jurisdiction, and explore restructuring options to stay compliant while safeguarding competitiveness.

Jurisdictional Impact Monitoring:

While Hong Kong’s rules are designed to minimise disruption, businesses must closely monitor how other jurisdictions adopt and apply Pillar Two.

Variations in local legislation—particularly around Qualified Domestic Minimum Top-Up Taxes (QDMTTs), safe harbour rules, and rule ordering—could lead to inconsistent outcomes and compliance challenges for multinational groups.

Compliance Requirements: What Hong Kong Businesses Need to Do Now

With the OECD Pillar Two global minimum tax approaching, Hong Kong businesses must proactively remain compliant and mitigate financial risks.

Key Compliance Steps:

• Assess Your Tax Exposure:
  Identify whether your business meets the EUR 750 million threshold and evaluate the impact of the global minimum tax.
• Calculate Your Effective Tax Rate (ETR):
  Ensure your company’s jurisdictional ETR meets the 15% global minimum tax requirement.
• Enhance Tax Reporting Systems & Data Readiness:
  Strengthen internal tax functions to accommodate increased disclosure requirements. Ensure that ERP systems, accounting platforms, and data management processes can capture and report all necessary GloBE-related data points accurately.
• Leverage Transitional Reliefs & Safe Harbours:
  Businesses should prepare early to meet the filing and data conditions required to access transitional safe harbour rules. These provisions may reduce immediate compliance burdens and potential penalties during the transition period.
• Work with Tax Advisors:
  Seek expert guidance to navigate OECD Pillar Two compliance strategies and optimise tax structures.

Monitor Regulatory Updates:

Stay informed about Hong Kong IRD announcements and any potential refinements while keeping a close watch on how other jurisdictions implement their Pillar Two rules.

Where To Next?

Navigating the complexities of the OECD Pillar Two global minimum tax in Hong Kong requires expert tax planning and strategic advice.

At InCorp, we specialise in guiding businesses through international tax regulations, compliance obligations, and corporate structuring to minimise tax burdens while staying fully compliant.

Get in touch with our tax experts today to develop a tailored approach to Pillar Two compliance and safeguard your business’s financial future.