# Hong Kong's Territorial Tax System in 2026: Foreign-Sourced Income, Substance and the Global Minimum Tax Author: Furuzonfar Zehni, Jefferson Trust Limited Published: 2026-08-11 Canonical: https://jeffersontrust.shinos.me/insights/hong-kong-territorial-tax-fsie-substance-global-minimum-tax/ Ten years after Hong Kong joined the BEPS project, what remains of the territorial principle: the FSIE regime, economic substance and the 15% minimum tax. --- In June 2016 the Hong Kong Government announced, in carefully neutral terms, that it would join the OECD's base erosion and profit shifting project as an Associate: four minimum standards would be supported, and the city's standing as an international financial centre protected. Read a decade later, the announcement was a considerable 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 toll-house principle Taxing by territory is the oldest idea in fiscal history. Along the caravan routes that ran through Central Asia, a merchant paid where his goods moved (at the pass, the bridge, the city gate) and no toll-keeper in Samarkand cared what he owed in Kashgar. Tax followed the trade, not the trader. Hong Kong's profits tax is that principle in modern statutory form: profits arising in or derived from Hong Kong are chargeable, and the rest is not Hong Kong's business. That basic rule survives. What changed on 1 January 2023 is that certain foreign-sourced income received in Hong Kong is now deemed to arise here unless the recipient meets a test. The Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 brought four categories into charge when received in Hong Kong (interest, dividends, disposal gains on equity interests, and intellectual property income) and the 2023 amendment ordinance widened the third from 1 January 2024 to disposal gains on all types of property. Income in one of those categories, received here by an entity in scope, is chargeable unless the entity satisfies the economic substance requirement, or (for dividends and equity gains) the participation exemption, or (for IP income) the nexus requirement. The toll-house, in other words, has learned to ask a new question: not just "did goods pass this way?" but "did your caravan actually stop here, or is our name merely painted on your saddlebags?" The comparison eventually stretches, but it holds long enough to organise everything that follows. ## Who is caught This is the point most often stated incorrectly, so precision is worth the space. The regime applies to an "MNE entity": a person that is, or acts for, a multinational enterprise group, meaning a group with at least one entity or permanent establishment outside the ultimate parent's jurisdiction. There is no revenue or asset threshold. Size is irrelevant. Nor does the absence of a group put you outside it. The ordinance also captures the "stand-alone MNE entity": one entity, one jurisdiction, with a permanent establishment somewhere else. A Hong Kong company with a branch abroad and no group above it is in scope. Purely domestic Hong Kong groups are not; 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 (holding equity interests, earning dividends and equity disposal gains, nothing else) faces a reduced requirement: meet the corporate law filing obligations, and hold adequate human resources and premises in Hong Kong for holding and managing the participations. Every other entity in scope must employ an adequate number of qualified employees and incur adequate 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 the structures we see it is the sensible answer — with the ordinance's two conditions read seriously: the specified activities must actually be carried out by the outsourced provider in Hong Kong, and the 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 a number. It is measured against what the entity does — a holding company with one asset needs less than a treasury company lending across four jurisdictions, and the Inland Revenue Department will look at the two differently. ## The participation exemption An entity that fails the substance test may still be exempt on dividends and equity disposal gains, and the conditions are cumulative. Hong Kong residence or a permanent establishment here. Not less than 5% of the equity in the investee, held continuously for not less than 12 months before the income accrues. And the income, or the investee's underlying profits, subject to a qualifying similar tax abroad at no less than the reference rate — currently 15%, and note "currently": the statute lets the Secretary for Financial Services and the Treasury amend that 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 rule withdrawing the exemption to the extent the dividend was deductible for the payer, and a main purpose rule. ## Intellectual property IP income is handled more tightly. Relief runs through the nexus approach: only the portion of income attributable to qualifying research and development expenditure escapes, by a prescribed fraction with a 30% uplift. Qualifying IP is an exhaustive list — patents, patent applications, and copyright subsisting in software. Trade marks and marketing intangibles do not qualify at all; a structure routing brand royalties through Hong Kong has no shelter here. Pulling the other way, the 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, a mismatch worth checking rather than assuming away. ## 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, passed on 28 May 2025 and gazetted on 6 June, applies to groups with annual consolidated revenue of EUR 750 million or more in at least two of the four preceding fiscal years, and imposes a minimum effective rate of 15%. Hong Kong adopted the income inclusion rule and a Hong Kong minimum top-up tax for fiscal years beginning on or after 1 January 2025; the undertaxed profits rule waits on a date to be specified. The domestic top-up tax is routinely misread as a tax increase. It is not — it is a question of venue. If a large group's Hong Kong effective rate falls below 15%, some jurisdiction will collect the difference; Hong Kong's position is simply that it should be collected here rather than abroad. The routes, after centuries of merchants detouring around the expensive passes, have agreed a floor on the toll. For the great majority of privately held groups the EUR 750 million 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 better to say so plainly. First, the architecture around Pillar Two is still moving: the Inclusive Framework approved a side-by-side package on 5 January 2026 under which an electing group would sit outside the income inclusion and undertaxed profits rules, with several components (the routine profits test, the de minimis test, reporting adaptations, an anti-arbitrage rule) still being worked through during 2026. Hong Kong's own top-up tax holds transitional qualified status on the OECD central record. Transitional is the operative word. Second, the treaty network keeps expanding underneath it all. As at July 2026, Hong Kong had concluded comprehensive double taxation agreements with 59 jurisdictions, 51 in force, and negotiations commenced or scheduled with 16 more. The Multilateral Instrument, in force for Hong Kong since 1 September 2022, overlays the covered agreements with its principal purpose test: a treaty 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. ## Still a low pass, honestly kept The ordinary rates have not moved (8.25% on the first HK$2 million of a corporation's assessable profits, 16.5% above) and Hong Kong came off the EU's Annex II watchlist on 20 February 2024, appearing on neither annex today. It remains a low-tax place to run a business, in good standing. What has gone is the empty transit. You can no longer hold assets through a Hong Kong company with no local activity and assume the foreign income sits outside the net. Substance is people, expenditure, premises and decisions taken here — with evidence for all four when the Department asks. The toll is still charged at the pass, and the toll is still low. The pass has simply learned to check that you actually came through it. --- *This article is general information about Hong Kong tax law as at August 2026, not advice on any particular structure — the analysis turns on facts. Jefferson Trust Limited holds TCSP licence TC005824; enquiries: info@jeffersontrust.hk.* ## Sources - Inland Revenue Department, "Foreign-sourced Income Exemption" https://www.ird.gov.hk/eng/tax/bus_fsie.htm - Inland Revenue (Amendment) (Taxation on Specified Foreign-sourced Income) Ordinance 2022 (Ord. No. 17 of 2022) https://www.ird.gov.hk/eng/pdf/es12022265117.pdf - Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Ordinance 2023 (Ord. No. 32 of 2023) https://www.ird.gov.hk/eng/pdf/es12023274932.pdf - Inland Revenue Department, "Global minimum tax and Hong Kong minimum top-up tax for multinational enterprise groups" https://www.ird.gov.hk/eng/tax/bus_beps.htm - "Government welcomes passage of Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Bill 2024", 28 May 2025 https://www.info.gov.hk/gia/general/202505/28/P2025052800539.htm - Inland Revenue Department, "Patent Box" https://www.ird.gov.hk/eng/tax/bus_patentbox.htm - Inland Revenue Department, "Profits Tax" (rates) https://www.ird.gov.hk/eng/tax/bus_pft.htm - Inland Revenue Department, "Comprehensive Double Taxation Agreements concluded" https://www.ird.gov.hk/eng/tax/dta_inc.htm - Financial Services and the Treasury Bureau, "Comprehensive Avoidance of Double Taxation Agreement" https://www.fstb.gov.hk/en/treasury/general/comprehensive-avoidance-of-double-taxation-agreement.htm - Inland Revenue Department, "Hong Kong's covered tax agreements under the Multilateral Instrument", 28 September 2022 https://www.ird.gov.hk/eng/ppr/archives/22092801.htm - European Commission, EU list of non-cooperative jurisdictions, update of 17 February 2026 https://taxation-customs.ec.europa.eu/document/download/3ceac073-5184-46a0-864a-b3038e4d9a6b_en?filename=eu_list_update_17-02-2026.pdf - OECD/G20 Inclusive Framework, "Side-by-Side Package", 5 January 2026 https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/global-minimum-tax/side-by-side-package.pdf