On 22 December 2023, Hong Kong issued a consultation paper¹ on the implementation of Pillar Two GloBE Rules (i.e., Income Inclusion Rule and the Undertaxed Profits Rule (UTPR)) and the domestic minimum top-up tax in Hong Kong (HKMTT) starting from fiscal years beginning on or after 1 January 2025. The consultation paper explains the policy considerations and the design features of the GloBE Rules and invites views on administrative framework of the GloBE Rules as well as the design and administration of HKMTT.

Hong Kong will closely follow the OECD model rules and related guidance with limited local adaptions as far as practicable. The government also reiterates that Hong Kong will uphold its simple tax regime and has proposed business-friendly measures to minimize the compliance burden. The related legislation will be submitted in the second half of 2024.

Some of the key features of the proposed rules are highlighted below.

Charge to tax

The proposed GloBE Rules and HKMTT will apply to constituent entities (CEs) of multinational enterprise (MNE) group whose revenue in the consolidated financial statements of the ultimate parent entity is equivalent to €750m or more for at least two years out of four years preceding the fiscal year, except for certain regulated exclusions.

All Hong Kong CEs of the MNE group, including those held under joint venture structures, will be subject to the whole amount of the HKMTT irrespective of the ownership interest being held.

Although Hong Kong currently does not impose tax based on an entity's residence, it is proposed that with retrospective effect from 1 January 2024, an entity is a Hong Kong resident entity for GloBE purpose if it is incorporated/constituted in Hong Kong or if it is normally managed or controlled in Hong Kong.

The GloBE Rules and HKMTT are calculated in accordance with the OECD model rules. It is proposed to allow the use of local financial accounting standard for the HKMTT computation and the minimum effective tax rate is set at 15%. The UTPR is proposed to be levied as an additional tax (i.e., the equivalent adjustment approach). A de minimis exclusion, Substance-based Income Exclusion and relief for MNE groups in their initial phase of international activity are also available.

Safe harbors

The consultation paper proposes an election to apply a transitional safe harbor based on the country-by-country reporting rules for accounting periods commencing on or before 31 December 2026 and ending on or before 30 June 2028.

It is proposed to include the permanent Qualified Domestic Minimum Top-up Tax safe harbor and may consider adoption of simplified calculation safe harbor for non-material CEs.

Tax compliance

The MNE group will need to file annual top-up tax notification and a single top-up tax return via a dedicated electronic platform. The top-up tax notification must be filed within six months after the end of the fiscal year and the top-up tax return must be filed within 15 months (extended to 18 months for transition year).

The group can designate a Hong Kong CE to arrange the tax filings and payment. No provisional top-up tax will be charged, and it is proposed to allow two weeks from the date of the notice of assessment for paying the top-up tax.

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ENDNOTE

¹ Consultation Paper: Implementation of Global Minimum Tax and Hong Kong Minimum Top-Up Tax