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Hong Kong issued the consultation outcome on 30 October 2024¹ regarding the implementation of Pillar Two GloBE Rules (i.e., Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR)) and the domestic minimum top-up tax in Hong Kong (HKMTT), collectively the Pillar Two Rules.² The consultation outcome summarizes stakeholders' feedback and suggests certain refinements on features of the proposed legislation, including:

• Implement the IIR and the HKMTT from 1 January 2025, while implementation of the UTPR is postponed subject to further studies.
• Introduce a definition of "Hong Kong-resident entity" for general tax purposes (rather than only applicable to the Pillar Two Rules, as previously proposed) with retroactive effect from 1 January 2024. (This definition is not expected to affect the tax liabilities or other obligations of entities under the existing Hong Kong tax system.)
• Exclude investment entities and insurance investment entities from the scope of the HKMTT to preserve tax neutrality for these entities.
• Include a transitional UTPR safe harbor to allow relief for groups with a non-Hong Kong ultimate parent entity.
• Introduce a main purpose test as a general anti-avoidance provision for Pillar Two Rules with no grandfathering provisions.
• Structure the Pillar Two Rules under the general Hong Kong tax legislation to allow application of existing tax administration procedures and to resolve cross-border disputes under tax treaties. Future guidance issued by the Organisation for Economic Co-operation and Development (OECD) should be incorporated through subsidiary legislation in Hong Kong. The Hong Kong tax authority will also publish its own guidance on the Pillar Two Rules in due course.

The Hong Kong government also proposes the following tax compliance and administration approaches for the Pillar Two Rules:

• Allow an annual designation of one or more paying entities for HKMTT and UTPR purposes.
• Explore a "clean exit" mechanism when a Hong Kong entity leaves the group. Subject to the satisfaction of specified conditions, an entity could be released from joint and several liability under HKMTT and UTPR after leaving the group.
• Extend the time limits for the payment due date, raising tax assessments and lodging objections under the Pillar Two Rules.
• Consider the OECD transitional penalty relief regime in the Hong Kong Pillar Two penalty mechanism.

The Pillar Two bill is expected to be introduced in Hong Kong by January 2025 and enacted by mid-2025.