A practical guide to relocation

For a cross-border group considering a move to Hong Kong, the central legal question is not where the company is incorporated – it is where the company is managed and controlled. Under Hong Kong's territorial profits-tax regime, a company resident in Hong Kong by reason of its management and control being exercised there is treated differently from one that merely holds a Hong Kong registration. Get the sequencing wrong, and the group may find itself tax-resident in two places at once, or in neither, or subject to a challenge in the jurisdiction it believed it had left.

This guide sets out the practical steps in order, identifies the gate at each stage, and flags the single most common mistake that well-advised groups still make. The cross-border interface throughout is Hong Kong as the hub jurisdiction, set against the Mainland, the BVI, the Cayman Islands, Singapore, Cyprus and the European jurisdictions our clients most frequently come from.

What does the management-and-control test actually decide?

The management-and-control test determines where a company is resident for tax purposes, and therefore where its profits are liable to be taxed. Hong Kong applies a territorial basis: the Inland Revenue Department assesses profits tax – at 16.5% on corporations, or 8.25% on the first HK$2,000,000 under the two-tier regime – only on profits sourced in Hong Kong. Whether a company falls within that regime at all depends substantially on where its management and control is exercised, not on where it was formed.

The test is a facts-and-circumstances analysis. Courts and revenue authorities across common-law jurisdictions have settled on a cluster of indicators: where the board meets, who attends, what decisions are taken at those meetings, where the chief executive and senior officers habitually work, and where the substantive commercial decisions are made. A BVI-incorporated holding company whose directors all sit in Hong Kong and take all material decisions there may well be managed and controlled in Hong Kong. A Hong Kong-registered company whose directors invariably meet in London and sign decisions drafted by European advisers may not be.

This matters in two directions. First, a group relocating to Hong Kong needs to establish genuine management and control in the territory to benefit from the territorial tax system. Second, a group relocating away from another jurisdiction needs to sever management and control in the origin country – failing to do so may mean the company remains tax-resident there even after the move. Both directions must be addressed simultaneously. That is the sequencing challenge this guide addresses.

Step one: mapping the current position before anything moves

Before the first director books a flight, the group needs a clear picture of where management and control currently sits – and where each relevant revenue authority currently believes it sits. That is the gate at step one: an honest audit of the facts as they stand, not as the group intends them to be.

In our cross-border practice, the audit covers five areas. First, where the board formally meets and what decisions it takes. Second, where the chief executive and senior management habitually work and what authority they exercise day to day. Third, what the group's existing filings with tax and corporate authorities say about residence and place of effective management. Fourth, whether any double-taxation arrangement between the origin jurisdiction and Hong Kong applies – and if so, which tie-breaker rule would govern a residence dispute. Fifth, whether any controlled-foreign-company rules in the origin jurisdiction would apply to entities formally moved to Hong Kong.

Groups that skip this audit routinely discover mid-move that a revenue authority in the origin jurisdiction has already formed a view about residence. Unwinding that position once the move has started is substantially harder than dealing with it before the first step. The governing instrument at this stage is the origin jurisdiction's domestic tax statute, read alongside any applicable double-taxation agreement. No step two should commence until the audit is complete.

Step two: structuring the holding layer – where does Hong Kong fit?

Hong Kong typically enters a cross-border group structure as either the operational holding company sitting above the Mainland or regional operating subsidiaries, or as the family-office hub through which investment decisions flow. The choice between those two positions has different implications for the management-and-control analysis.

An operational holding company structure requires the Hong Kong entity to exercise genuine control over its subsidiaries. That means board-level decisions on capital allocation, subsidiary governance, and material commercial matters must be taken in Hong Kong. A pure holding entity that simply receives dividends and does nothing else sits closer to a passive structure – and a passive structure attracts more scrutiny under both the foreign-sourced income exemption (FSIE) regime (the regime, in force from 1 January 2023, that requires economic substance in Hong Kong for passive income to be exempt from profits tax) and the economic-substance requirements of the BVI and Cayman Islands.

The gate at step two is substance. The question is not whether the entity exists in Hong Kong but whether it does anything real there. Substance means: at least some directors who are physically present and genuinely engaged in Hong Kong; board meetings held in Hong Kong with attendance records that reflect real deliberation; management accounts prepared and reviewed in Hong Kong; and, where relevant, a genuine employee or service-provider presence. A nominee-director structure with annual meetings held by circular resolution satisfies none of those requirements.

For groups coming from the Mainland, the interface with the Arrangement for the Avoidance of Double Taxation between the Mainland and Hong Kong is directly relevant here. The Arrangement's tie-breaker for corporate residence refers to the place of effective management. A group that claims Hong Kong residence for the holding entity while all real decisions are made in a Mainland city will face a challenge under that tie-breaker. See our related analysis of family-office relocation from CIS jurisdictions for the parallel challenge when the origin is a Russian or CIS group structure.

Step three: severing management and control in the origin jurisdiction

Establishing management and control in Hong Kong and severing it in the origin jurisdiction are separate acts. Many groups treat them as a single event. They are not. Completion of Hong Kong incorporation, appointment of Hong Kong directors, and even the relocation of key personnel to Hong Kong do not automatically terminate residence in the jurisdiction of departure.

What terminates origin-jurisdiction residence depends entirely on the domestic law of that jurisdiction. Some countries apply a pure management-and-control test and accept that residence ends when the last material decision is taken outside the territory. Others apply an incorporation test and regard a company incorporated under their laws as permanently resident regardless of where it is managed. Others still apply a dual test and will assert residence until the company is formally deregistered or the incorporation-jurisdiction domicile is changed.

The gate at step three is the exit filing. In most common-law origin jurisdictions, the group must notify the revenue authority of the change of residence and file a cessation return covering the period up to the date of departure. In civil-law jurisdictions, the exit is typically more formal: a resolution of the board and shareholders, filing with the commercial registry, and in some cases a formal liquidation of the domestic entity (rather than a continuation). Our desk regularly sees groups that have moved directors and management to Hong Kong without ever filing the exit notification in the origin country – meaning the origin revenue authority continues to regard the company as resident and files tax assessments accordingly.

Where the origin jurisdiction is a BVI or Cayman-incorporated entity, the formal step is less a "departure" filing and more a review of the economic-substance declaration filed with the relevant registry, which must now reflect the actual place of management. See our related briefing on relocating a holding company from the BVI to Hong Kong for the specific steps in that corridor.

Step four: running the Hong Kong tax position – the FSIE regime and its implications

Once management and control is genuinely established in Hong Kong and the origin position is resolved, the group must then address how Hong Kong profits tax will apply to the entity going forward. This is not a one-time calculation. It is an ongoing substance question, and it is governed primarily by the FSIE regime for passive income and the two-tier profits-tax system.

The FSIE regime, in force from 1 January 2023, requires a Hong Kong-resident entity receiving passive income – dividends, interest, royalties, and disposal gains on equity interests – from a foreign source to satisfy an economic-substance test, a participation exemption, or a nexus requirement (for intellectual property income) to avoid Hong Kong profits tax on that income. "Economic substance" in this context means adequate physical presence, adequately qualified employees or contracted service providers, and an appropriate level of operating expenditure in Hong Kong. The exact thresholds and how the Inland Revenue Department applies them in practice depend on the type of entity and the nature of the income – parties should verify the current position before acting.

For Pillar Two (the OECD global minimum-tax framework, under which Hong Kong has introduced a minimum top-up tax and an income-inclusion rule), the threshold is consolidated group revenue of EUR 750 million or more, with the regime effective for fiscal years beginning on or after 1 January 2025. Groups below that threshold are outside Pillar Two but remain subject to the FSIE regime. Groups at or above it need to model how the minimum top-up tax interacts with the Hong Kong profits-tax position, particularly where the effective rate on Hong Kong-sourced profits falls below the 15% global minimum.

The gate at step four is a current-year tax model that takes both regimes into account, run before the first balance-sheet period closes in Hong Kong. Running the model after the year-end, when the income has already been received and the substance position is fixed, is too late to correct the filing position.

What foreign advisers most commonly get wrong

The most common error our desk encounters is timing the management-and-control transfer to the corporate event rather than to the facts. A group decides to relocate; the board resolves that from a given date all management will be in Hong Kong; the Hong Kong company is incorporated; and the advisers declare the move complete. None of that matters to a revenue authority that asks one question: where, in the relevant year, were the board decisions actually taken?

If the directors relocated to Hong Kong in November and the year-end is December, eleven months of management-and-control facts point to the origin jurisdiction. The corporate resolution says November. The revenue authority will look at the facts. This is the single point where otherwise well-structured moves are successfully challenged.

The fix is simple in principle but requires discipline in execution: the management-and-control transfer must precede the corporate event by a period sufficient to establish a genuine pattern of decision-making in Hong Kong. In our cross-border practice, we typically advise starting the behavioural change – board location, decision-making, management presence – at least one full operating quarter before the intended effective date of the move, and documenting every board meeting and material decision from that point forward.

A second common error is treating the holding structure as static once it is in place. The management-and-control position is re-assessed every year by the revenue authority. A group that establishes genuine substance in the first year and then allows directors to relocate, meetings to shift back to the origin country, or management functions to migrate to a subsidiary in another jurisdiction may find the Hong Kong residence position eroded without any formal act of departure. The substance must be maintained, not just established.

Decision checklist: the gate at each step

The following checklist reflects the sequence above. Each gate must be passed before the next step is commenced. Where a step involves a filing or a filing deadline, parties should verify the current position with locally licensed advisers in the relevant jurisdiction before acting.

Audit complete: current management-and-control position mapped for every entity in the group; origin-jurisdiction residence status confirmed; double-taxation arrangements identified.
Holding structure designed: Hong Kong entity positioned correctly – operational holding or family-office hub; substance plan prepared; FSIE and Pillar Two applicability assessed.
Substance plan approved: directors identified and physically available in Hong Kong; board-meeting calendar set; management-account and decision-making process documented.
Origin-jurisdiction exit prepared: exit notification mechanism confirmed with origin-jurisdiction counsel; cessation return period identified; exit filing timetable agreed.
Management-and-control transfer commenced: board meetings held in Hong Kong; material decisions documented with Hong Kong as the place of decision; personnel changes effected.
Behavioural pattern established: at least one full operating quarter of documented Hong Kong-based management before the formal effective date.
Exit filings made: origin-jurisdiction notifications and cessation return submitted; origin-jurisdiction registries updated as required.
Hong Kong tax model finalised: current-year profits-tax position modelled; FSIE substance position documented; Pillar Two assessment (if applicable) prepared before year-end.
Ongoing review calendar set: annual substance review scheduled; board-calendar and management-presence monitoring built into the group's governance calendar.

The sequence is not reversible. An error at step three – the origin exit – cannot be cured by additional substance in Hong Kong after the fact. An error at step four – the tax model – cannot be cured by a retrospective substance adjustment. The sequence must be followed in order, with each gate genuinely passed before the next step begins.

For groups managing the interface with a Mainland Chinese counterparty or subsidiary, the additional layer of the Mainland–Hong Kong Arrangement for the Avoidance of Double Taxation must be factored into both the residence analysis and the withholding-tax position on intra-group payments. The general capital relocation practice page sets out how our desk approaches that interface across the most common corridor pairings.

How Lockhart & Yip approaches this mandate

We advise on the international and cross-border dimensions of management-and-control relocations: the sequencing, the substance planning, the double-tax-agreement analysis, and the interaction with the FSIE regime and Pillar Two. We work alongside locally licensed Hong Kong firms on matters of Hong Kong law, and alongside origin-jurisdiction counsel on the exit side of the move.

In our cross-border practice, we find that the mandate almost always turns on two things: the precision of the behavioural timeline and the quality of the documentation. Revenue authorities are sophisticated; they will review board minutes, travel records, email metadata, and management accounts. The group that has documented its management-and-control position consistently and in real time is substantially better placed than the group that reconstructs the record after a challenge has been raised.

The sequence above describes the standard position. Your matter turns on the specific entities involved, the origin and destination jurisdictions in play, and the year in which the move is timed – which is where the route is won or lost.

To discuss how the management-and-control test applies to your cross-border structure, contact info@lockhartyip.com.

If an earlier relocation attempt produced an ambiguous or stalled residence position, a structured review can identify the gap and the steps still open. Write to info@lockhartyip.com to discuss.

Related practices

Tax Positions – FSIE regime, Pillar Two and treaty analysis for cross-border groups
Holding Structures – BVI, Cayman and Hong Kong holding-entity design and substance planning

Frequently asked questions

Do I need a Hong Kong adviser for relocation and the management-and-control test?

The short answer is yes – but the mandate spans more than one jurisdiction. The management-and-control analysis requires counsel who can read the origin-jurisdiction position alongside the Hong Kong position. A Hong Kong tax adviser alone cannot resolve the exit-filing question in the origin country. In our cross-border practice, we coordinate the international dimensions of the move – the sequencing, the double-tax-agreement analysis, the FSIE and Pillar Two positions – while working alongside locally licensed Hong Kong firms and origin-jurisdiction counsel on their respective domestic-law components.

What are the main risks in relocation and the management-and-control test?

The principal risks are dual residence – the group is regarded as tax-resident in both the origin jurisdiction and Hong Kong during an overlap period – and failed exit, where the origin-jurisdiction revenue authority continues to assess the company as resident because the exit filing was not made or the management-and-control facts do not support the declared departure date. A secondary risk is FSIE non-compliance, where the entity receives passive income in Hong Kong without meeting the required economic-substance conditions, exposing that income to Hong Kong profits tax at the standard rate. All three risks are addressable with correct sequencing and documentation.

How long does relocation and the management-and-control test usually take?

The timeline depends on the origin jurisdiction, the complexity of the group structure, and the time needed to establish a genuine behavioural pattern of management in Hong Kong. A single holding entity relocating from a common-law jurisdiction with a straightforward exit-filing mechanism may complete the substantive steps within two to three quarters. A group with multiple layers, Mainland operating subsidiaries, and an origin jurisdiction that applies a formal de-registration process may require twelve months or more to complete the sequence properly. We assess the timeline at the audit stage and build a step-by-step calendar before any entity is moved.

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

A practical guide to relocation and the management-and-control test