Where treaty access between Hong Kong and the BVI stands now

The BVI holding company sitting above a Hong Kong operating structure is one of the most common configurations in Asian cross-border work. It is also one of the most frequently misread from a tax position. Principals who built these structures in an era of lighter international scrutiny are now discovering that the question was never the headline rate – it was always whether the income flow qualifies for protection in the first place.

Hong Kong and the British Virgin Islands do not have a bilateral tax treaty. The cross-border tax position on income flows between the two jurisdictions rests entirely on the domestic rules of each – Hong Kong's territorial system under the Inland Revenue Ordinance, and the BVI's own zero-corporate-tax regime – overlaid by the economic-substance and treaty-shopping rules that international standards have imposed on both, at different speeds and with different mechanisms. The result is a structure that looks simple and is not.

This analysis sets out where the risk sits now: what treaty access actually means in the Hong Kong–BVI context, how substance requirements have changed the calculation, and where the pressure points are for a group reviewing its position in the current environment.

What is actually at stake commercially?

The holding-company layer serves several functions simultaneously. It separates the operating entity from the ultimate owner. It can aggregate dividends from multiple jurisdictions before onward distribution. It provides a clean vehicle for third-party investors or lenders. And, in the Hong Kong–BVI corridor specifically, it has historically offered a frictionless route between a common-law holding centre and a zero-tax offshore jurisdiction.

None of those functions disappear under current rules. What changes is the risk that the structure is re-characterised – either by a Mainland counterpart jurisdiction treating the BVI entity as a conduit, or by the BVI's own economic-substance regime finding insufficient substance in the island, or by the OECD's Pillar Two (the global minimum-tax framework agreed under the OECD/G20 Inclusive Framework) creating top-up liability at the parent level even where the BVI layer nominally pays no local tax.

The commercial stakes, then, are not primarily about a rate differential. They are about whether the structure holds under scrutiny – from a revenue authority, from a counterparty in due diligence, from a lender running substance analysis, or from an acquirer pricing deal risk. In our cross-border practice, the conversations our desk sees most often are not "can we set up a BVI holding company above Hong Kong?" but "the structure exists – does it survive the review it is about to face?"

Why "treaty access" means something specific here

The phrase "treaty access" in the Hong Kong–BVI context is commonly used loosely, and the looseness creates its own risk. There is no bilateral tax treaty between Hong Kong and the British Virgin Islands. Neither party is a treaty partner of the other in the conventional double-taxation-agreement sense.

What practitioners actually mean when they ask about treaty access in this corridor is one of three distinct things – and conflating them is where planning goes wrong.

The first is access to Hong Kong's treaty network via an entity that is resident, for treaty purposes, in Hong Kong. If a holding company is incorporated in the BVI but managed and controlled in Hong Kong – and if it qualifies as a Hong Kong tax resident under the Inland Revenue Ordinance – it may in principle claim treaty benefits under Hong Kong's growing network of comprehensive avoidance of double taxation agreements (CDTAs). The complication is that residence for treaty purposes requires genuine management and control, and that test has tightened considerably.

The second is access to the Mainland China–Hong Kong arrangement. The Arrangement for the Avoidance of Double Taxation on Income between the Mainland and Hong Kong is not a conventional treaty but an arrangement under the "one country, two systems" framework. A BVI entity cannot claim directly under that arrangement. Only a Hong Kong-resident entity can. This distinction – obvious when stated – is frequently missed by overseas counsel who treat the BVI and Hong Kong interchangeably as part of a single offshore structure.

The third is the question of whether the BVI entity itself can access any treaty. The BVI has a small network of tax information exchange agreements and a limited number of double-taxation treaties of its own, but it is not a jurisdiction whose treaty network is typically the reason a group incorporates there. The BVI is used for its corporate law and its absence of local tax, not for treaty access in the conventional sense.

Understanding which of these three questions a client is actually asking is the first step. The answer to each is different, and the structuring response to each is different.

The economic-substance dimension: how the BVI rules bite

The BVI's economic-substance regime – introduced to meet international standards set by the OECD Forum on Harmful Tax Practices and the EU Code of Conduct Group – requires that certain categories of "relevant activity" be conducted with genuine substance in the territory. Holding companies carrying on a pure equity holding business (one that only holds equity participations and earns dividends and capital gains) face a reduced substance requirement. But that category is narrower than it appears, and many structures that were designed as holding companies have accumulated sufficient activity to fall outside it.

Where a BVI entity engages in relevant activities such as holding company business outside the narrow equity-holding definition, fund management, headquarters functions, or intellectual-property holding, the substance requirement is substantive. The entity must have adequate employees, adequate expenditure, and adequate physical presence in the BVI – or it must demonstrate that it is tax resident elsewhere and subject to tax there. The latter route – claiming foreign tax residence – removes the BVI substance issue but raises the treaty-access question in the Hong Kong jurisdiction instead, because now the entity needs to demonstrate genuine Hong Kong residence.

In our cross-border practice, we see this as the pinch point. The BVI entity that claims non-BVI residence (typically Hong Kong) to escape the BVI substance requirement must then face Hong Kong's own management-and-control analysis. The two tests do not sit comfortably together unless the structure is genuinely managed and controlled from Hong Kong, with board meetings in Hong Kong, decisions made in Hong Kong, and records kept in Hong Kong. A nominee-director arrangement that works procedurally in the BVI will not satisfy the Hong Kong revenue position.

Hong Kong's territorial system and the FSIE regime: where the source question bites

Hong Kong taxes profits arising in or derived from Hong Kong. Offshore income – profits sourced outside Hong Kong – is in principle not chargeable under the Inland Revenue Ordinance. This territorial basis has historically been the reason groups route income through Hong Kong-resident entities: they can earn offshore income tax-free if the source is outside Hong Kong.

The foreign-sourced income exemption regime, which came into force on 1 January 2023, changed the position for certain categories of passive income earned by Hong Kong-resident entities that are part of multinational enterprise groups. Dividends, interest, disposal gains, and income from intellectual property are now subject to an economic-substance condition, a participation condition, or a subject-to-tax condition before the offshore exemption applies.

For the Hong Kong–BVI structure, this matters in the following way. A Hong Kong-resident intermediate holding company receiving dividends from a BVI subsidiary must now satisfy the relevant FSIE conditions. The participation condition – broadly, that the Hong Kong entity holds a sufficient equity interest in the BVI entity – is typically met. The economic-substance condition for dividends requires that the Hong Kong entity have adequate substance in Hong Kong. That condition, again, sends the analysis back to what the Hong Kong entity actually does, with real employees and real decisions, in Hong Kong.

The subject-to-tax condition requires that the income is subject to tax in the jurisdiction of the paying entity. For the BVI, which has no corporate tax, this condition cannot be met. The FSIE regime provides an alternative route – meeting the participation condition – but the details depend on the specific income type and the current legislative position, which groups should verify before acting.

The centre of gravity, as the content brief for this analysis correctly identifies, is source and substance under the territorial system. The headline rates are not the issue. The issue is whether the structures that groups built to exploit the territorial basis – and the BVI's zero-rate position – survive a substance analysis that has become materially more demanding.

Pillar Two and the BVI holding layer: a new variable in an old structure

For multinational enterprise groups with consolidated revenue above EUR 750 million, the OECD Pillar Two global minimum-tax rules introduce a new dimension. Hong Kong enacted its own minimum top-up tax and income inclusion rule, effective for fiscal years beginning on or after 1 January 2025.

A BVI holding company, paying zero local tax on income it earns, may trigger a top-up liability at the level of the parent group's jurisdiction under the income inclusion rule. The question is not whether the BVI is a low-tax jurisdiction – it is, self-evidently – but whether the income in question is qualified domestic minimum top-up tax-protected or whether the group has arranged its structure to minimise the top-up exposure.

For groups of this scale, the BVI holding layer that made obvious sense in a pre-Pillar-Two world requires re-analysis. If the BVI entity has no substance and pays no tax, its income is fully exposed to top-up at the parent level. If the BVI entity's income flows to a Hong Kong entity that is part of the same group, the question becomes whether that income is characterised correctly under both the FSIE regime and the Pillar Two qualified domestic minimum top-up tax calculations.

This is not a problem that has a single answer. It depends on the specific income flows, the group structure, the residence of the ultimate parent, and the elections available under the Pillar Two rules. What it is, clearly, is a problem that did not exist before 2025 and that groups with legacy BVI structures above Hong Kong operating entities have not universally addressed.

The sequence above describes the standard position. Your matter turns on the income flows and entities actually engaged, the substance deployed at each level, and the ordering of steps across both jurisdictions – which is where the structure is defended or exposed.

To assess how the FSIE regime and the Pillar Two rules interact with your BVI holding layer, write to us at info@lockhartyip.com.

What foreign counsel typically get wrong

The cross-border interface between Hong Kong and the BVI is one where overseas counsel – from Mainland China, from Europe, and from the United States – routinely bring assumptions that do not survive contact with the actual position.

The most common error is treating Hong Kong and the BVI as interchangeable parts of a single "offshore" arrangement. They are not. Hong Kong is a common-law jurisdiction with a domestic tax system, a growing treaty network, a functioning court system, and a set of regulatory obligations that apply to entities managed and controlled in Hong Kong. The BVI is a separate jurisdiction with its own corporate law, its own substance requirements, and its own international obligations. An instruction given to a BVI registered agent does not automatically create Hong Kong management and control – and conflating the two is where structures fail.

The second error is assuming that "no treaty" means "no problem." In fact, the absence of a bilateral Hong Kong–BVI treaty means the structure must stand entirely on its own substance. There is no treaty benefit to fall back on if a Mainland revenue authority challenges a payment from a Mainland entity to a BVI holding company. The BVI entity has no treaty protection vis-à-vis Mainland China; the only treaty protection available is through a Hong Kong-resident entity that genuinely qualifies.

A third, increasingly frequent error is treating the BVI's economic-substance rules as a filing exercise. They are not. We regularly advise groups whose BVI entities have filed economic-substance returns that do not reflect the actual conduct of the business. The return says "managed and controlled in Hong Kong." The evidence – board minutes, management decisions, records – does not support that. That discrepancy is a risk that compounds over time.

If an earlier filing, structure, or enforcement attempt produced an adverse or stalled result, a second read can identify the strategic error and the routes still open.

For a structured assessment of your BVI holding layer and the treaty and substance position across the two jurisdictions, write to us at info@lockhartyip.com.

The comparative read: Hong Kong vs the BVI as a holding hub

The question groups increasingly face is not whether to have a BVI entity but where to locate the centre of gravity of the structure.

Hong Kong, as a holding hub, offers treaty access – a network of CDTAs covering the principal investment jurisdictions relevant to Asian groups, including the Mainland China arrangement. It offers a common-law legal system with an independent judiciary and an apex court – the Court of Final Appeal. It offers the ability to register and enforce Mainland judgments under the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance, which came into force on 29 January 2024. And it offers a profits-tax rate with a two-tier structure: 8.25% on the first HK$2,000,000 of assessable profits, and 16.5% above. That is not zero, but it is a competitive rate with genuine treaty and enforcement infrastructure behind it.

The BVI, as a holding hub, offers zero corporate tax, a flexible corporate law that is widely understood by international lenders and investors, and a long track record as a neutral holding jurisdiction. What it does not offer is treaty access to Mainland China, treaty access to Hong Kong's network (unless via a Hong Kong-resident entity), or the enforcement infrastructure of a common-law court with Mainland reciprocal arrangements.

For groups whose primary risk is Mainland Chinese counterparty or revenue-authority challenge, the BVI-over-Hong Kong structure needs careful analysis. The Mainland's own beneficial ownership rules – applied under domestic Chinese tax legislation and the OECD's base-erosion-and-profit-shifting standards – require a real beneficial owner with real substance in the claiming jurisdiction. A BVI entity with a nominee director and a post-office-box address does not satisfy that test. A Hong Kong entity with genuine management, real employees, and documented decision-making may well do so.

That comparison is the practical driver of many of the restructurings we see: from a BVI-only top to a BVI-over-Hong Kong or a Hong Kong-only structure, depending on where the group's assets, income, and enforcement risk actually sit.

For a detailed comparison of Hong Kong and the BVI as holding hubs for your specific jurisdiction pair, see our analysis on tax review before BVI exit or distribution and our guide on treaty access between Hong Kong and CIS jurisdictions.

Our view on where the risk sits now

The risk in the current environment is not that the BVI holding structure is prohibited. It is that a structure built on assumptions that were reasonable five or ten years ago now sits on a weaker foundation than its owners appreciate.

The economic-substance rules in the BVI have real regulatory teeth. Entities that fail the substance test – or that claim non-BVI residence without genuinely satisfying the residence test in the claimed jurisdiction – face automatic exchange of information disclosures to their beneficial owners' home jurisdictions. That is an enforcement mechanism, not merely a filing requirement.

The FSIE regime in Hong Kong has changed the position on passive income earned by Hong Kong entities. The Pillar Two minimum-tax rules, effective from 1 January 2025 for in-scope groups, have introduced a top-up liability at parent level that the structure must now account for.

And the broader international environment – the OECD's continuing work on the taxation of multinational enterprises, the EU's ongoing review of non-cooperative jurisdictions, and the Mainland's increasingly assertive beneficial-ownership analysis – means that the pressure on these structures is directional. It is increasing, not decreasing.

For groups with a BVI holding layer above a Hong Kong operating entity, the action is not to dismantle the structure reflexively. It is to understand, with precision, which risks the structure currently carries – at the BVI level, at the Hong Kong level, and at the parent level – and to make considered decisions about whether the existing configuration remains fit for purpose.

That analysis requires a practitioner who understands both the Hong Kong territorial system and the BVI substance regime, and who can map the interaction between them against the actual income flows and decision-making patterns of the group. It is precisely the cross-border work our desk is built for.

A well-managed reassessment of the position takes account of the FSIE conditions, the BVI economic-substance test, the Pillar Two exposure (where relevant), and the treaty-access question for the group's key income corridors. It does not require dismantling the structure. It does require understanding it accurately.

Related practices

• Tax Positions – source and substance analysis, FSIE and treaty positions across Greater China and offshore
• Holding Structures – BVI and Cayman holding vehicles, Hong Kong intermediate entities, restructuring options

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Related

• Tax Positions
• Treaty Access Between Hong Kong Cis Cis Guide
• Tax Review Before Bvi Exit Or Distribution Bvi 2

This publication is general information and does not constitute legal advice. For advice on your situation, contact info@lockhartyip.com.