Update: tax residence and management-and-control for a holding company

A holding company incorporated in one jurisdiction and directed from another carries a structural risk that surfaces long before any tax assessment arrives. Where the board meets, who signs, and where decisions are actually made – these are the facts that determine management and control (the common-law test for corporate tax residence) and, under Hong Kong's territorial system, whether income is treated as arising inside or outside the jurisdiction.

Tax residence for a holding company is determined not by the place of incorporation but by the place where central management and control is exercised; under Hong Kong's territorial profits-tax system, that assessment interacts directly with the economic-substance conditions of the foreign-sourced income exemption (FSIE) regime – the regime governing when offshore passive income is exempt from Hong Kong profits tax – which has applied since 1 January 2023, as amended.

This briefing sets out what that means in practice, who it affects across the Greater China and offshore corridors, and the immediate steps a holding company should take.

What the current position requires

Hong Kong taxes profits on a territorial basis. Only Hong Kong-sourced profits are chargeable; the rate is 8.25% on the first HK$2,000,000 of assessable profits and 16.5% above. That structure has always been understood by cross-border groups to favour offshore passive income.

The FSIE regime, in force from 1 January 2023 and subsequently amended, qualified that understanding. Dividends, interest, disposal gains and royalties received by a Hong Kong entity from offshore sources are no longer automatically outside the charge. They may be brought into scope unless the recipient entity meets the economic-substance conditions prescribed under the Inland Revenue Ordinance. For a pure holding company – one whose principal activity is holding equity – the substance threshold is lower than for an active company, but it is not zero. The entity must be resident in Hong Kong for tax purposes and must demonstrate that it holds its interests in a manner consistent with genuine economic presence here.

That is where management and control becomes critical. A holding company whose directors are resident abroad, whose board decisions are made informally outside Hong Kong, or whose registered address is the only Hong Kong connection may not satisfy the residency test that underpins the exemption claim. The risk is not theoretical. The Inland Revenue Department has the information-exchange tools to probe substance, and Pillar Two – the global minimum top-up tax effective for fiscal years beginning on or after 1 January 2025 for in-scope multinational groups with consolidated revenue of EUR 750 million or more – adds a second layer of exposure for larger structures.

Who this affects across the corridor

The structural tension is sharpest for three categories of group. First, Asian and CIS-based groups that incorporated a Hong Kong holding entity for its treaty access or reputational value but continue to direct the company from the principal jurisdiction. Second, BVI or Cayman holding structures where a Hong Kong intermediate entity sits in the chain without genuine decision-making activity at that level. Third, European or Middle Eastern groups that re-routed passive income through a Hong Kong entity after the FSIE amendments without reviewing the management-and-control position at the same time.

In each case, the income may be clean on source, the entity properly incorporated, and the accounts filed on time – yet the exemption claim fails because the central management and control test is not met in Hong Kong.

A practical illustration: a mid-market manufacturing group with a Cayman parent, a Hong Kong intermediate holding entity, and operating companies in the Mainland came to our desk in early 2027. The Hong Kong entity had received dividends from the Mainland subsidiaries. The directors were based in the Cayman Islands and Singapore. No board meetings had been held in Hong Kong in the preceding two years, and no resolution had been signed by a locally present director. The FSIE exemption claim for those dividends was at material risk – not because the income was sourced incorrectly, but because the management-and-control evidence for Hong Kong residence was absent.

Groups using Cyprus, the United Kingdom or Singapore as a parallel holding layer face a related question: if those jurisdictions also assert management and control, a dual-residence conflict arises. Treaty tie-breaker provisions – where a relevant treaty applies – determine which residence prevails, but the analysis must be done jurisdiction by jurisdiction. Our desk has addressed this cross-border conflict in the context of Cyprus holding restructurings; the relevant considerations are discussed in our analysis of tax review before a Cyprus exit or distribution and in the matter note on tax-efficient holding routes between the United Kingdom and Hong Kong.

The immediate actions

Three steps should be completed before the next board cycle or filing period.

The first is a management-and-control audit of each holding entity in the structure. This means mapping where directors are resident, where board decisions are actually made, and whether the documentary record – minutes, resolutions, director communications – supports a Hong Kong residence claim. Board minutes that post-date decisions taken informally offshore will not cure the defect.

The second is a substance review against the FSIE conditions applicable to the company's income type. Holding-company income (dividends and disposal gains) carries a defined minimum-substance standard under the Inland Revenue Ordinance. That standard must be met at the entity level, not at group level, and it must be met in the year the income is received.

The third is a Pillar Two read for groups near or above the EUR 750 million threshold. The interaction between the minimum top-up tax and a failed FSIE exemption claim can produce an unexpected charge that neither the Hong Kong filing nor the group's home-jurisdiction Pillar Two calculation anticipated.

Our Tax Positions practice covers all three steps across Hong Kong and the relevant offshore and treaty jurisdictions.

The sequence above describes the standard position. Your matter turns on the specific facts – where your directors sit, how your board operates, and what your income record shows for the current and prior years. Those details determine whether the exemption holds and, if it does not, which remediation steps remain available.

To discuss the management-and-control and FSIE position for your holding structure, write to us at info@lockhartyip.com.

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Related

• Tax Positions
• Tax Review Before Cyprus Exit Or Distribution Cyprus
• Tax Efficient Holding Route Between United Kingdom Hong 2

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