Update: staged relocation of an operating business to Asia

Relocating an operating business to Asia is not a single event. It is a sequence of legal, tax and structural decisions that must be made in the right order – and the order matters more than any individual step. Our desk is seeing a marked increase in enquiries from European, Middle Eastern and CIS-based groups that have begun the process without a clear sequence and are now stalled mid-transition.

A staged relocation of an operating business to Asia involves transferring management, control, operational substance and – where relevant – tax residence to a new hub, typically Hong Kong, while preserving continuity of contracts, licences and employment. The governing instruments include the Inland Revenue Ordinance and its management-and-control test for tax residence, the Companies Ordinance (Cap. 622) for corporate housekeeping, and the relevant offshore jurisdiction's business companies legislation where an intermediate holding layer is involved. No single step completes the relocation; each stage triggers consequences in the jurisdictions left behind as well as those being entered.

This briefing sets out the development that is now driving enquiries, who it affects, and the immediate action it calls for.

What has changed – and what is now forcing the sequence question

Two developments are converging. First, the introduction of the Pillar Two global minimum tax framework – 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 – is forcing groups to re-examine where their operating entities sit, where profits are booked, and whether their current hub jurisdiction still offers a credible economic-substance position.

Second, Hong Kong's foreign-sourced income exemption (FSIE) regime – the set of conditions under which foreign-sourced dividends, interest, royalties and disposal gains are not chargeable to profits tax – has pushed groups to demonstrate genuine substance in Hong Kong as a condition of accessing the regime. Being present on paper is not enough. The question is whether management and control – the legal test used to determine where a company is resident for Hong Kong tax purposes under the Inland Revenue Ordinance – actually sits in Hong Kong.

For groups that moved a holding entity but left their operating decisions, key personnel and board meetings in their origin jurisdiction, the answer to that question is almost certainly no. That gap is the structural problem now presenting itself.

Who is affected across the corridor

The pattern our desk sees most often involves a group incorporated in, or historically managed from, a European, CIS or Middle Eastern jurisdiction that has established a Hong Kong entity – sometimes also a BVI or Cayman holding layer – but has not completed the substance migration. The operating business: its contracts, its senior management, its board decisions, its banking relationships, its employment base. All of that remains in the origin jurisdiction.

That structure creates three compounding problems. The Hong Kong entity may not satisfy the management-and-control test under the Inland Revenue Ordinance, leaving its tax-residence claim vulnerable. The FSIE exemption may not apply to income received by the Hong Kong entity because the substance conditions are not met. And the Significant Controllers Register requirement – in force since 1 March 2018 under the Companies Ordinance – means that the corporate housekeeping obligations in Hong Kong are already running, regardless of how much operational substance has been transferred.

Groups at an earlier stage – those that have made the decision to relocate but not yet chosen a structure – face a sequencing question: which steps must be completed before others, and what triggers tax residence in Hong Kong rather than continuing it in the origin jurisdiction.

The immediate action

If your group has a partial relocation in progress – a Hong Kong entity exists, but the operating substance, personnel or decision-making remains in the origin jurisdiction – the first step is a structured assessment of where management and control actually sits under the Inland Revenue Ordinance test. That assessment drives everything else: the order of substance migration, the point at which Hong Kong tax residence is triggered, and the implications for the origin jurisdiction's tax treatment of outbound income.

For groups at the planning stage, the sequence question should be resolved before any corporate steps are taken. Establishing the Hong Kong entity first and moving substance later is the most common cause of a stalled or fiscally inefficient relocation. The structure should follow the sequence, not the other way around.

Our capital relocation practice covers the full staged process: mapping the relocation route, modelling substance and tax-residence requirements across Hong Kong and the relevant origin and holding jurisdictions, and preparing the migration steps in the right order. We work alongside locally licensed Hong Kong firms on matters of Hong Kong law and with allied counsel in origin jurisdictions where local-law advice is required.

For related context on holding and platform structures, see our guide to relocating a fund or investment platform to Hong Kong and the CIS-to-Hong Kong family office relocation overview. The full scope of our capital relocation service is set out at lockhartyip.com/practices/capital-relocation/.

To discuss your group's position and the sequence of steps that applies to your specific corridor, write to us at info@lockhartyip.com.

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Related

• Capital Relocation
• Relocating Fund Or Investment Platform Hong Kong Guide
• Cis Hong Kong Family Office Relocation Cis

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