Update: relocating IP and intangible assets into a Hong Kong group

A cluster of regulatory and tax developments – most recently the extension of Hong Kong's foreign-sourced income exemption (FSIE) regime, which imposes economic-substance conditions on passive offshore income with effect from 1 January 2023 and as subsequently amended – has made the sequencing of an IP relocation into a Hong Kong group both more deliberate and more time-sensitive than it was even two years ago. Groups sitting on intangible assets held offshore or in a Mainland Chinese entity are under renewed pressure to assess where the management and control of those assets actually sits, and whether their current structure matches the story they would tell a revenue authority.

This briefing sets out what has changed, which groups are most exposed, and what the immediate action is.

What changed – and why it matters now

The FSIE regime, administered by the Inland Revenue Department under the Inland Revenue Ordinance, extended its reach in successive amendments beyond dividends and interest to include IP income – royalties and gains from the disposal of intangible assets that route through a Hong Kong entity. An entity earning such income must now demonstrate genuine economic substance in Hong Kong or accept that the income loses its exemption and enters the profits-tax computation.

That shift changes the calculus for groups that previously parked IP in a Hong Kong holding company without meaningful local activity. It also changes the calculus in the opposite direction for groups that have genuine Hong Kong operations and want to establish the city as a credible IP jurisdiction. Done correctly, a relocation into a properly structured Hong Kong entity – one with substance, resident management and a defensible transfer-pricing position – can position royalty flows to benefit from Hong Kong's territorial profits-tax regime and from the 8.25% / 16.5% two-tier rates on assessable profits.

Simultaneously, the Pillar Two minimum top-up tax, effective for fiscal years beginning on or after 1 January 2025 for in-scope multinational enterprise groups with consolidated revenue at or above EUR 750 million, adds a second layer of analysis. IP income flowing through a low-effective-rate entity in any jurisdiction will attract a top-up charge somewhere in the group. Hong Kong's own Pillar Two implementation means that the territory is now a participant in that regime, not a bystander.

Who is affected across the corridor

Three categories of group are most immediately exposed.

First, Mainland Chinese operating groups that hold intangible assets – trade marks, patents, proprietary software, know-how – in an offshore entity (most commonly a BVI or Cayman vehicle) and route royalties back to the Mainland. The combination of the FSIE substance requirements, Mainland transfer-pricing scrutiny and the managed-and-controlled test creates a pinch point that is resolved cleanly only by establishing a Hong Kong entity with real decision-making presence.

Second, European and Middle Eastern groups that structured their Asia-Pacific IP ownership through a European holding company and now find the cross-border enforcement and tax position under greater scrutiny. Hong Kong, as a common-law jurisdiction with a well-tested court system and a territorial tax regime, offers a credible alternative hub for Asia-Pacific IP management.

Third, any group approaching a capital raise, a partial sale of the IP-holding entity, or an IPO where the structure will be placed under due diligence. In our cross-border practice, we regularly see IP structures that were designed for an earlier regulatory environment create friction – and sometimes material valuation risk – at the transaction stage.

The management-and-control test – the standard used to assess whether a company is resident in Hong Kong for tax purposes – sits at the centre of each scenario. An entity incorporated in Hong Kong whose board meets elsewhere, whose investment decisions are made overseas and whose records are held in another jurisdiction may not satisfy the test. Establishing credible management and control in Hong Kong before the transfer, not after, is the sequencing point most frequently missed.

What to do now

The immediate action is a structured review of three things: where management and control of the relevant intangible assets currently sits; what economic substance the existing holding entity can demonstrate in its current jurisdiction; and what transfer-pricing documentation supports the current royalty or cost-sharing arrangement.

If the answer to any of those questions is unsatisfactory, the window for an orderly relocation – one that is tax-neutral or near-neutral and is documented before the relevant valuation is set – is open now. It closes at the point that a revenue authority opens an enquiry, a transaction is announced, or the asset value moves in a way that makes the transfer-pricing position difficult to defend.

For groups considering Hong Kong as the destination, the inward company re-domiciliation regime that commenced in 2025 offers an additional route worth examining – it allows an eligible non-Hong Kong company to re-domicile to Hong Kong while preserving its legal identity, which may simplify the structural steps for some IP holding entities. Verify the current commencement date and eligibility perimeter before acting.

The sequence that we advise clients to follow is: assess and document first; establish substance (board composition, local management, records) second; transfer the asset at a defensible arm's-length value third; and confirm the FSIE position and any Pillar Two interaction fourth. Reversing that order is the most common error we see in cross-border IP relocations.

For a structured assessment of your IP holding position and the relocation route across the relevant jurisdictions, write to us at info@lockhartyip.com.

For further reading on structuring and relocation strategy, see our practice page on capital relocation, our guide to relocating a holding company from Singapore to Hong Kong, and our note on relocating a holding company from Mainland China to Hong Kong.

Related practices

• Capital Relocation – cross-border entity migration, substance establishment and re-domiciliation
• Tax Positions – FSIE analysis, Pillar Two interaction and transfer-pricing documentation

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Related

• Capital Relocation
• Relocating Holding Company From Singapore Hong Kong Singapore 4
• Relocating Holding Company From Mainland China Hong Kong 4

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