Update: treaty access between Hong Kong and the BVI

Treaty access between Hong Kong and the BVI is not a bilateral treaty relationship. The BVI has no comprehensive double-tax treaty network of its own. Access to Hong Kong's treaty arrangements through a BVI holding entity therefore turns on where substance sits, where management and control is exercised, and how the Inland Revenue Ordinance characterises the source of income flowing through the structure.

That position has not changed overnight. What has changed is the scrutiny applied to it. Across the Hong Kong – BVI corridor, the window for structures that rely on a thin BVI holding company as a treaty conduit is narrowing. Tax administrations and counterparties are asking harder questions about economic substance, and the foreign-sourced income exemption (FSIE) regime – Hong Kong's rule requiring economic-substance conditions to be met before offshore income is exempt from profits tax – has brought the analysis sharply into focus for groups with BVI entities receiving passive income attributable to Hong Kong.

What has changed, and why it matters now

The FSIE regime came into force on 1 January 2023 and has been amended since. Under that regime, certain categories of foreign-sourced income – dividends, interest, disposal gains and royalties – received in Hong Kong by a constituent entity of a multinational group are subject to profits tax unless specific economic-substance or participation conditions are satisfied. For a BVI entity that channels income to or from a Hong Kong entity, the question is no longer abstract.

Separately, Pillar Two – the global minimum tax – applies to in-scope multinational groups for fiscal years beginning on or after 1 January 2025. The threshold is consolidated group revenue of at least EUR 750 million. For groups at that scale, a BVI holding entity with minimal substance is no longer a neutral step in the chain. It is a potential gap in the qualified domestic minimum top-up tax (QDMTT) calculation and a point of exposure under the income inclusion rule.

Neither development eliminates the BVI as a holding jurisdiction. The BVI remains a common-law centre with a well-tested corporate statute and established use above Hong Kong operating companies. But a structure that was acceptable before these regimes took effect may now produce outcomes its principals did not intend. The trigger for review is not a single deadline – it is cumulative exposure that is already running.

Who is affected across the Hong Kong – BVI corridor

The immediate audience is any group or family office that holds Hong Kong operating entities or assets through a BVI vehicle and expects to receive dividends, interest, royalties or disposal proceeds into or through that vehicle. That covers a wide range of principals: Asian industrial groups with offshore holding layers, founders who structured internationally before Hong Kong's substance rules tightened, and family offices using BVI companies as the first layer above a Hong Kong base.

The risk is not identical for all of them. A BVI company that demonstrably exercises management and control from Hong Kong – board meetings held in Hong Kong, decisions taken by Hong Kong-resident directors, books kept locally – may be treated as Hong Kong-resident for tax purposes under the Inland Revenue Ordinance's management-and-control test. That changes the analysis entirely: the entity is brought within the Hong Kong profits-tax net and the treaty access question becomes whether Hong Kong's own treaty network applies. Hong Kong has concluded comprehensive avoidance agreements with a number of jurisdictions; whether any of them is relevant depends on where the counterparty or the income source sits.

A BVI company that is genuinely managed outside Hong Kong but lacks substance in the BVI – and in no other jurisdiction with a relevant treaty – sits in a more difficult position. It may access no treaty protection at all.

In our cross-border practice, we regularly see structures that were set up under the assumption that a BVI holding layer was tax-neutral and treaty-accessible. That assumption is worth testing against the current rules before a distribution, a sale, or a refinancing crystallises the exposure.

The immediate action

Three steps are relevant now. First, map where management and control of the BVI entity actually sits. The factual record – board composition, meeting minutes, signing authority, day-to-day decisions – determines whether the entity is Hong Kong-resident or genuinely offshore. This is the foundational question; everything else follows from it.

Second, assess whether any income flowing through the structure falls within the FSIE regime's categories. If it does, identify whether the relevant substance or participation condition is met. If it is not met, the exposure to Hong Kong profits tax at 16.5% (or 8.25% on the first HK$2 million of assessable profits under the two-tier regime) is live.

Third, for groups above the Pillar Two threshold, review the BVI entity's position in the global anti-base erosion (GloBE) rules calculation. A low-taxed entity in a zero-tax jurisdiction may attract a top-up charge in the jurisdiction of the ultimate parent.

The sequencing matters. A restructuring that addresses FSIE without considering Pillar Two, or that corrects the management-and-control position without updating the treaty analysis, may close one gap while opening another. We advise clients across this corridor to treat the review as a single exercise, not three separate ones.

For a structured assessment of your Hong Kong – BVI position across the FSIE regime and the current treaty access analysis, write to us at info@lockhartyip.com.

Further reading on related positions: Tax Positions – our practice | Tax review before Mainland China exit or distribution | Tax residence: management and control – a holding company matter.

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Related

• Tax Positions
• Tax Review Before Mainland China Exit Or Distribution 2
• Tax Residence Management Control Holding Company Matter

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