Hong Kong's Territorial Tax System in 2026: Foreign-Sourced Income, Substance and the Global Minimum Tax

In June 2016 the Hong Kong Government announced that it would join the OECD's base erosion and profit shifting project as an Associate. I wrote about it at the time in neutral terms: Hong Kong would support four minimum standards, and the decision would protect its reputation as an international financial centre.

That was an understatement. Joining the inclusive framework committed Hong Kong to a process, and the process has rewritten the most distinctive feature of its tax system. Anyone still describing Hong Kong as a place where foreign income is simply untaxed is describing 2016.

The territorial principle, narrowed

Hong Kong taxes profits arising in or derived from Hong Kong. That basic rule survives. What has changed is that certain foreign-sourced income received here is now deemed to arise here unless the recipient meets a test.

The Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 came into operation on 1 January 2023, bringing four categories into charge when received in Hong Kong: interest, dividends, disposal gains on equity interests, and intellectual property income. Twelve months later the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Ordinance 2023 widened the third category, so that from 1 January 2024 the regime covers foreign-sourced disposal gains on all types of property.

Income in one of those categories, received in Hong Kong by an entity within scope, is chargeable to profits tax unless the entity satisfies the economic substance requirement, or, for dividends and equity disposal gains, the participation exemption, or, for IP income, the nexus requirement.

Who is caught

This is the point most often stated incorrectly, so it is worth being precise.

The regime applies to an "MNE entity" — a person that is, or acts for, a multinational enterprise group or an entity included in one. An MNE group includes at least one entity or permanent establishment not located in the jurisdiction of the ultimate parent entity. There is no revenue or asset threshold; size is irrelevant.

It does not follow that a company without a group is outside the regime. The ordinance also captures a "stand-alone MNE entity" — an entity in one jurisdiction with one or more permanent establishments in others. A Hong Kong company with a branch abroad and no group above it is in scope. Purely domestic Hong Kong groups, and individuals, are not.

Substance is now something you evidence

For income other than IP income, the way out is the economic substance requirement, and the ordinance splits entities in two.

A pure equity-holding entity — one that only holds equity interests and earns dividends and equity disposal gains — faces a reduced requirement: comply with the corporate law filing obligations, and have adequate human resources and premises in Hong Kong for holding and managing those participations. Every other entity in scope must employ an adequate number of employees with the necessary qualifications, and incur an adequate amount of operating expenditure in Hong Kong, for making the strategic decisions and managing the risks on the assets concerned.

Outsourcing is permitted, and for many of our clients it is the sensible answer. But the ordinance conditions it: the specified economic activities must be carried out by the outsourced entity in Hong Kong, and the MNE entity must exercise adequate monitoring and control over them. A service agreement filed away and never looked at again does not meet that description.

"Adequate" is deliberately not defined by a number. It is measured against what the entity actually does — a holding company with one asset needs less than a treasury company lending across four jurisdictions, and the Department will look at the two differently.

The participation exemption

Where dividends or equity disposal gains are concerned, an entity that fails the substance test may still be exempt. The conditions are cumulative and each one bites.

The entity must be a Hong Kong resident or have a permanent establishment here. It must have continuously held not less than 5% of the equity interests in the investee entity for not less than 12 months immediately before the income accrues. And the income, or the investee's underlying profits, must be subject to a qualifying similar tax outside Hong Kong at an applicable rate equal to or higher than the reference rate, currently 15%.

Note that word "currently". The statute allows the Secretary for Financial Services and the Treasury to amend the reference rate by notice in the Gazette. It is not fixed in primary legislation.

Three anti-abuse rules sit on top: a switch-over rule, an anti-hybrid mismatch rule that withdraws the exemption to the extent a dividend is deductible for the payer, and a main purpose rule.

Intellectual property

IP income is treated more tightly. Relief runs through the nexus approach, under which only the portion of income attributable to qualifying research and development expenditure escapes charge, calculated by a prescribed fraction with a 30% uplift.

The definition of qualifying intellectual property is exhaustive: patents and patent applications, and copyright subsisting in software. Trade marks and other marketing intangibles do not qualify at all. A structure routing brand royalties through a Hong Kong company has no shelter here. Pulling the other way, Hong Kong's patent box taxes qualifying Hong Kong-sourced IP income at 5% from the year of assessment 2023/24, on a definition of eligible IP that is not identical to the FSIE one.

The global minimum tax

The second half of the BEPS project arrived last year. The Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Ordinance 2025 was passed by the Legislative Council on 28 May 2025 and gazetted on 6 June 2025.

It applies to groups with annual consolidated revenue of EUR 750 million or above in at least two of the four preceding fiscal years, and imposes a minimum effective tax rate of 15%. Hong Kong adopted the income inclusion rule and a Hong Kong minimum top-up tax, both payable for fiscal years beginning on or after 1 January 2025. The undertaxed profits rule was not brought in with them; it is to be implemented on a date specified later by the Secretary for Financial Services and the Treasury.

The domestic top-up tax is often misread as a tax increase. It is not. If a large group's Hong Kong effective rate falls below 15%, some jurisdiction will collect the difference; Hong Kong's position is that it should be collected here rather than abroad.

For the great majority of privately held groups the threshold means none of this applies. It matters for large groups, and for anyone whose Hong Kong effective rate is depressed by concessions.

What is genuinely unsettled

Two things, and it is better to say so.

First, the architecture around Pillar Two is still moving. The Inclusive Framework approved a side-by-side package on 5 January 2026, under which a group electing the new safe harbour would not be subject to the income inclusion rule or the undertaxed profits rule. Several components — the routine profits test, the de minimis test, reporting adaptations and an anti-arbitrage rule — were still being worked through during 2026. Hong Kong's own minimum top-up tax holds transitional qualified status on the OECD central record. Transitional is the operative word.

Second, the treaty network keeps expanding underneath all of this. As at July 2026 Hong Kong had concluded comprehensive double taxation agreements with 59 jurisdictions, 51 of them in force, with negotiations commenced or scheduled with a further 16. The Multilateral Instrument entered into force for Hong Kong on 1 September 2022, and its principal purpose test now overlays the covered agreements: a benefit is refused where obtaining it was one of the principal purposes of the arrangement. A structure relying on a treaty rate should be able to explain itself in commercial terms, not only in tax ones.

What this means in practice

Hong Kong's ordinary profits tax rates have not moved: 8.25% on the first HK$2 million of a corporation's assessable profits and 16.5% above that. Hong Kong came off the EU's Annex II watchlist on 20 February 2024 and appears on neither annex today. It remains a low-tax place to run a business, in good standing.

What has gone is the ability to hold assets through a Hong Kong company with no local activity and assume the foreign income sits outside the net. Substance is no longer a drafting point. It is people, expenditure, premises and decisions taken here — and, when the Department asks, evidence of all four.

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This article is general information about Hong Kong tax law as at August 2026. It is not advice on any particular structure, and the analysis turns on facts. If you would like your existing arrangements reviewed against the current position, write to us at [email protected].