Update: Pillar Two and the Hong Kong minimum top-up

For fiscal years beginning on or after 1 January 2025, multinational enterprise groups with consolidated revenue at or above EUR 750 million are in scope for Hong Kong's minimum top-up tax and the income inclusion rule under the global minimum tax regime – instruments that sit alongside, and interact with, Hong Kong's existing territorial profits-tax system under the Inland Revenue Ordinance.

What Has Changed and When It Applies

Hong Kong's Pillar Two legislation introduced two interlocking mechanisms: a qualified domestic minimum top-up tax (QDMTT, a domestic charge calibrated to bring the effective tax rate of Hong Kong constituent entities to 15%) and an income inclusion rule (IIR, which attributes low-taxed income of subsidiaries to the ultimate parent). Both apply to in-scope groups for accounting periods commencing on or after 1 January 2025. Groups that have already opened their first in-scope fiscal year are now carrying live exposure.

The practical shift is less about Hong Kong's headline rate – the two-tier profits tax peaks at 16.5% for corporations, comfortably above 15% for most operating entities – and more about the interaction between the territorial basis of charge and the Pillar Two substance tests. Hong Kong taxes Hong Kong-sourced profits only. Where substance is thin, where income is re-characterised as foreign-sourced under the foreign-sourced income exemption (FSIE) regime, or where profits flow through holding entities without adequate local activity, the effective tax rate calculation can produce a shortfall that triggers a top-up charge.

This is the centre of gravity for cross-border principals: not the headline rate, but the source-and-substance analysis underneath it.

Who Is Affected Across the Hong Kong–Mainland Corridor

The in-scope population centres on groups that use Hong Kong as a regional holding or treasury hub above Mainland Chinese operating entities. Several configurations create immediate exposure.

First, holding entities that receive dividends, interest or royalties from Mainland counterparties and rely on the FSIE exemption may find that those amounts, stripped from the domestic charge, reduce the effective tax rate of the Hong Kong constituent entity below 15% when the Pillar Two computation is applied. Second, groups with thin Hong Kong head-office functions – where management decisions are made elsewhere and local payroll or premises are nominal – face substance scrutiny under both the FSIE regime and the Pillar Two substance-based income exclusion. Third, groups with BVI or Cayman Islands intermediate holding entities above Hong Kong operating companies should map where the IIR charge falls: depending on the group's ultimate parent jurisdiction and any qualified IIR or QDMTT in that jurisdiction, the top-up may be collected at a level that was not anticipated in the original structure.

Our cross-border tax practice regularly sees groups that settled their structure before the FSIE amendments of 2023 and have not revisited the position since. That gap is now consequential.

What to Do Now

Three steps are immediately actionable for in-scope groups with a Hong Kong constituent entity.

First, complete the effective tax rate (ETR) computation for each Hong Kong entity on Pillar Two methodology – this differs from the standard profits tax computation and must be done separately. The ETR test applies per jurisdiction, aggregating all constituent entities in a given jurisdiction before determining whether a top-up is due.

Second, review the substance position of each Hong Kong entity against the Pillar Two substance-based income exclusion for payroll and tangible assets. Where substance is borderline, the exclusion may materially reduce the top-up base; where it is absent, the full income amount is exposed.

Third, confirm the filing and notification obligations under the Inland Revenue Ordinance as amended for Pillar Two. Deadlines run from the close of the relevant accounting period. Groups whose fiscal year ended 31 December 2025 are the first cohort approaching their return cycle. Parties should verify the current filing timeline with the Inland Revenue Department before acting.

For a structured assessment of your group's Pillar Two exposure across Hong Kong and the relevant offshore and Mainland entities, write to us at info@lockhartyip.com. We assess the tax-residence and source position, model the FSIE and Pillar Two implications, and document the filing approach across the relevant jurisdictions.

Further analysis on the interaction between tax positions and cross-border structures in Hong Kong is available on our practice page. For the management-and-control dimension of holding company residence, see our analysis on tax residence, management and control for holding companies. Withholding tax planning across Greater China structures is addressed in our matter note on that topic.

Frequently asked questions

What does the route look like for Pillar Two and the Hong Kong minimum top-up tax for a large group?

The route runs from entity mapping to ETR computation to filing. A group identifies its Hong Kong constituent entities, computes the effective tax rate per Pillar Two methodology for the jurisdiction, determines whether a QDMTT or IIR charge arises, applies the substance-based income exclusion where available, and then meets the notification and return obligations under the Inland Revenue Ordinance. The cross-border layer involves coordinating with the ultimate parent jurisdiction to avoid double-counting of top-up charges already collected domestically.

What is the first step in Pillar Two and the Hong Kong minimum top-up tax for a large group?

The first step is confirming whether the group crosses the EUR 750 million consolidated revenue threshold and identifying every Hong Kong constituent entity within the group structure. Many groups with regional holding arrangements discover additional Hong Kong entities – treasury companies, IP holding entities, intermediate holdcos – that were not originally mapped for Pillar Two purposes. The ETR computation cannot proceed accurately until the entity perimeter is settled.

What documents are needed for Pillar Two and the Hong Kong minimum top-up tax for a large group?

The core documents include the group's consolidated financial statements, individual entity profit-and-loss accounts on an adjusted Pillar Two basis, payroll and tangible-asset data for the substance-based income exclusion, details of any taxes paid or accrued at the Hong Kong entity level, and any country-by-country reporting already filed. Where Hong Kong entities rely on the FSIE exemption, the income classification and substance documentation supporting that exemption feed directly into the ETR computation and should be reviewed together.

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

Update: Pillar Two and the Hong Kong minimum top-up tax for a large group

What Has Changed and When It Applies

Who Is Affected Across the Hong Kong–Mainland Corridor

What to Do Now

Frequently asked questions

Speak with Lockhart & Yip

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