Financial Secretary Paul Chan delivered Hong Kong’s 2026-27 Budget on 25 February. Themed as ‘Driving High‑quality, Inclusive Growth with Innovation and Finance’, the Budget is focused on sustaining growth momentum, advancing long‑term capability building and positioning Hong Kong to capture new opportunities.

Hong Kong’s economy grew by 3.5% in 2025, marking the third consecutive year of expansion, supported by strong external trade and a recovery in domestic demand. It is forecast to grow by 2.5%-3.5% in the year ahead, while the headline inflation rate is expected to remain below 2%.

Chan said a buoyant economy and capital market had driven higher tax revenues, while a reinforced fiscal consolidation programme had helped public finances improve sooner than expected. To preserve the SAR’s simple and low-rate tax regime, the government will introduce and extend a series of modest tax relief measures for households in 2026, along with a package of preferential tax policies for targeted businesses and industries.

To raise revenue, the government is to raise stamp duty rates from 4.25% to 6.5% on high-value residential property transactions valued above HKD100 million (USD12.8 million). It will also continue to implement the OECD Pillar Two Global Minimum Tax, which has been in force since financial years (FYs) starting on or after 1 January 2025.

Under the rules, multinational enterprise (MNE) groups with consolidated annual revenue of at least €750 million are required to pay top-up taxes if their effective tax rate falls below the minimum 15%. According to Chan, implementation of these rules is expected to bring in an additional HKD15 billion (USD1.9 billion) in tax revenue per year starting from FY 2027-28.

To align Hong Kong’s economic future with its development goals, the focus of investment in the Budget was in the innovation, artificial intelligence and international financial sectors, with initiatives including:

• Asset and Wealth Management – to increase the number of single-family offices in Hong Kong, which currently exceeds 3,300, and attract funds to set up in Hong Kong, the HK government will introduce an amendment bill in the first half of this year to enhance the tax regime and expand the scope of ‘fund’ to cover specific funds-of-one, as well as classifying digital assets, precious metals, specified commodities as qualifying investments eligible for tax concessions; it will also legislate to enable privatisation of Real Estate Investment Trusts (REITs) and to amend the law next year to provide stamp duty waiver for transferring non-residential properties into REITs seeking to list.
• Corporate Treasury Centres (CTCs) – the HK government to relax criteria for stamp duty relief for intra-group transfer of assets, applicable to instruments signed from Budget day. Further measures to strengthen Hong Kong as a base for CTCs to be announced in the middle of this year, including additional tax incentives, greater flexibility for CTCs and associated companies, and the introduction of a pre-approval mechanism.
• Company Re-domiciliation Regime – with the approval of 22 re-domiciliation applications since commencement of the regime in 2025 and a further 20 applications being processed, the government will step up publicity to attract more enterprises to establish in Hong Kong.
• Development of Digital Assets – CMU OmniClear, which operates Hong Kong’s central securities depository (CSD) for fixed-income, to establish digital asset platform in the year to support issuance and settlement of digital bonds. The government will introduce a bill this year to establish licensing regimes for, among others, digital asset dealing and custodian service providers.
• Intellectual Property Trading – the HK government to introduce legislation this year for tax deduction arrangements for capital expenditure in purchasing intellectual property; to invest HKD28 million in the Hong Kong Technology & Innovation Support Centre for patent evaluation and implement a two-year Pilot Patent Valuation Support Scheme; to invest HKD52 million for Intellectual Property Academy on two-year pilot.
• Trade Centre – the HK government to introduce amendment to tax law this year for preferential policy packages, including preferential arrangements on land grants, financial subsidies and tax incentives. Preferential tax rates at half rate or 5%; to set up Advisory Committee on Tax Policy; to set up cross-sectoral professional services platform to support Mainland enterprises expanding overseas using Hong Kong as a base; and to invest HKD100 million to attract international, large-scale exhibitions with new elements.
• Mutual Market Access – the HK government to expedite the launch of Chinese Government Bond futures in Hong Kong, inclusion of REITs in mutual access, and inclusion of RMB trading counter under Southbound Stock Connect.
• Driving AI+ Development – the HK government to establish Committee on AI+ and Industry Development Strategy to transform industries; the Hong Kong AI Research & Development Institute to operate in second half of year to support R&D and transformation of outcomes.
• Small and Medium-sized Enterprises (SMEs) – the HK government to inject a further HKD200 million into the Dedicated Fund on Branding, Upgrading and Domestic Sales (BUD Fund) to assist Hong Kong-based companies capitalise on opportunities in the Chinese Mainland and ASEAN countries, and raise the funding ceiling of ‘Easy BUD’ to HKD150,000 per application; to increase the total loan guarantee commitment to enterprises through the SME Financing Guarantee Scheme by HKD20 billion and extend the application period for the 80% Guarantee Product to the end of March 2028 and the application period for the principal moratorium arrangement to mid-November this year.
• Aviation, Shipping and Logistics – the HK government to launch a Future Innovative Logistics Acceleration Scheme this year to enhance interconnectivity of logistics data; to introduce legislation this year to enhance tax-concession measures for maritime services industry, provide half-rate tax concession to eligible commodities traders, revamp existing ship registration arrangements, extend current arrangements under Air Transhipment Cargo Exemption Scheme.
• Supporting Emerging Industries – the HK government to set up HKD10 billion I&T Industry-Oriented Fund to begin operation this year to channel market capital into strategic and emerging industries, including life and health technology, AI and robotics, and future industries; to review and enhance tax arrangements for R&D expenditures; to push for R&D and applications in embodied AI, quantum technology and new materials; to direct Office for Attracting Strategic Enterprises (OASES) to attract aerospace enterprises and Stock Exchange of Hong Kong (HKEX) to review listing requirements for aerospace enterprises; Hong Kong Investment Corporation (HKIC) and enterprises to establish Hong Kong RISC-V Alliance, forging collaboration among industries, academia and the investment sector in microelectronics.
• Gold Trading – the HK government to explore tax concessions for eligible institutions conducting gold trading and settlement in Hong Kong.
• New Industrialisation – the HK government to launch a New Industrialisation Elite Enterprises Nurturing Scheme this year to support high-growth enterprises; to allocate HKD220 million to establish the first national manufacturing innovation centre outside the Mainland at Yuen Long InnoPark, which will be led by the Hong Kong Microelectronics Research and Development Institute and focus on semiconductor R&D.
• Northern Metropolis for I&T – the HK government to set aside HKD10 billion each for the Hetao Hong Kong Park, the San Tin Technopole and the Hung Shui Kiu Industrial Park to accelerate the megaproject through the government’s partnership with developers and tech enterprises.

The government has launched a public consultation on the implementation of the OECD’s new Crypto-Asset Reporting Framework (CARF) and related amendments to the Common Reporting Standard (CRS 2.0) for the reporting and automatic exchange of information in respect of crypto-assets. It plans to complete the necessary legislative amendments in 2026 to implement the CARF rules to be effective on 1 January 2027 and the CRS 2.0 rules on 1 January 2028.

The government is committed to expanding Hong Kong’s network of Double Taxation Agreements, which currently comprises 55 agreements, including those signed last year with Jordan, Maldives, Norway and Rwanda.

In view of the evolving global tax environment, the Financial Secretary is to establish and chair an Advisory Committee on Tax Policy to gather views from commercial, industrial and professional sectors, so that Hong Kong’s tax policy can reinforce economic development.

2026 marks the first year of China’s 15th Five-Year Plan. Chan announced that Hong Kong will, for the first time, formulate its own local five-year plan, indicating that the region’s development trajectory will align more closely with national policy priorities in the coming years.

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Hong Kong’s status as the preeminent supply chain ‘super-connector’ for Chinese Mainland enterprises to expand overseas and for global companies to access the market and regional supply chains has been reaffirmed by a major new US-Hong Kong research initiative published in December.

Commissioned by the Hong Kong Trade Development Council (HKTDC) and conducted by the Bay Area Council Economic Institute of the United States, the study analysed the ways in which the shift in US trade policy has triggered the accelerated reconfiguration of global supply chains.

Titled ‘Strategically Leveraging Supply Chains to Access the Asian Market’, the study noted that heightened geopolitical tensions, evolving trade policies, environmental pressures and technological advancements had served as a collective catalyst for a supply chain revolution that was impacting every aspect of the global economy.

In the wake of this mass recalibration, companies are having to reassess their operations and look to manage previously unencountered risks, ensuring that resilience is now prioritised alongside cost management and consistent competitiveness. This, it said, will inevitably impact the primacy of Asia’s role within this transformed landscape.

While subject to the same US reciprocal tariffs as the Chinese Mainland, Hong Kong as a stand-alone customs territory maintains a zero-tariff rate distinct from the Mainland and does not impose reciprocal tariffs on the import of US goods.

This and the exemption from tariffs for qualified goods exported from Hong Kong to the Chinese Mainland under the Closer Economic Partnership Arrangement (CEPA) has positioned Hong Kong as a key potential platform for US sales to the China market. In 2018, the CEPA was extended extension to include trade facilitation measures in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).

To qualify for the preferential treatment, goods exported to the Chinese Mainland require a Certificate of Hong Kong Origin–CEPA (CO–CEPA) issued by the Hong Kong SAR’s Trade and Industry Department or by one of several Government Approved Certification Organisations (GACOs) such as the Hong Kong General Chamber of Commerce.

International companies with a qualified Hong Kong presence are eligible to leverage CEPA’s benefits when accessing the Chinese Mainland market. This can be done by establishing a legal entity in Hong Kong or by partnering with or acquiring a qualified Hong Kong company.

The manufactured products produced in Hong Kong and sold in the Mainland market will not be subject to Mainland tariffs. Qualifying companies are required to meet Rules of Origin thresholds that may consider where production occurs, apply a change in tariff heading (CTH) approach, and consider local content in a value-added requirement.

For zero-tariff treatment in some product categories, a company’s products must undergo “substantial transformation” in Hong Kong, with a value-added of at least 30%. Companies can subcontract for processing outside Hong Kong and add final finishing to a product in Hong Kong before its export to the Mainland.

This would, for example, allow a US company to establish a base of operations in Hong Kong, develop production partnerships in the GBA, and export those products to the Chinese Mainland under favourable CEPA terms.

When structuring contracts or joint ventures with Chinese Mainland partners, including those in the GBA, the foreign company’s Hong Kong entity has the ability to select Hong Kong as the governing law and seat for arbitration, assuring access to the city’s common law framework and significantly mitigating risk with regard to trade, investment, intellectual property, and other commercial disputes.

Service providers can also access CEPA benefits. Currently, the Chinese Mainland has fully or partially opened up 95.6% of its service sectors to Hong Kong companies. Benefits include the allowance of wholly-owned operations, relaxed restrictions on equity shareholding, reduced registered capital requirements, and relaxed restrictions on geographic location and business scope.

The critical step is to incorporate a legal entity in Hong Kong. Under CEPA’s non-discrimination principle, a foreign-owned company registered in Hong Kong will be treated as a “local Hong Kong service provider” and eligible for CEPA benefits.

The entity could be a regional headquarters, a project-specific company, or a joint venture with a local partner. With the recent removal of a qualification requirement of three years of substantive operations in Hong Kong, newly established companies can access these benefits almost immediately.

Another evolution of the original CEPA provides (with some exceptions) national treatment for investors from Hong Kong in all non-service sectors including manufacturing and investment in assets. Investment protection measures apply to both the service and non-service sectors, including restrictions on the expropriation of assets, the transfer and return of investments, and the simplification of procedures relating to investment. The Trade & Industry Department provides Hong Kong Investor (HKI) certificates to qualifying Hong Kong entities.

The report cited the electric vehicle (EV) sector as one example where Hong Kong is already playing a pivotal role in the regional supply chain transformation process. As mainland-based automotive manufacturers, as well as their global counterparts, prioritise the expansion of EV and battery production in Southeast Asia, Hong Kong has served as a crucial investment and financial hub, acting as an effective conduit for significant capital to be channelled into countries such as Indonesia, Thailand and Malaysia.

More generally, recent investment data also clearly indicated that Chinese Mainland companies are increasingly utilising Hong Kong as the support platform for many of their regional projects. This outcome bolstered by Hong Kong’s wide-ranging financial and professional services sectors, as well as the city’s agility in adapting to technological transformation and the evolving regulatory landscape.

“The adoption of strategies such as reshoring, nearshoring and developing redundant supply routes by many global businesses is accelerating the regionalisation of supply chains,” said Sean Randolph, Senior Director of the Bay Area Council Economic Institute. “Companies are diversifying their manufacturing bases, while relocating certain activities from China to other countries in Southeast Asia, India and Mexico – adopting the so-called ‘China+1’ strategy in order to ensure resilience and reduce risk exposure.

“At the same time, despite the ongoing bilateral friction, it is notable that many US companies remain deeply engaged with China. This is largely on account of the country’s unique concentration of suppliers – especially in the case of regions such as the GBA – which cannot be easily replaced or replicated elsewhere.

“Indeed, a number of recent surveys and announcements – including major Chinese Mainland investment commitments by businesses of the stature of Nvidia and Apple – have clearly demonstrated that, for many US businesses, China remains a key locale, with their engagement at least partly due to the indispensability of the broader regional supply chains,” said Randolph.

This new HKTDC research highlights Hong Kong’s vital roles as both a ‘super-connector’ and a ‘super-value-adder’, while confirming the city’s status as the key enabler for any mainland enterprise looking to expand overseas, and simultaneously serving as a gateway for any global company looking to access the revitalised regional supply chains and the China market.

“As companies reshape supply chains and seek resilient gateways into the region, Hong Kong remains one of the most efficient and trusted locations to establish a presence,” said Alan Fong, Sovereign Managing Director – Asia. “Hong Kong is a key strategic hub where regional, Mainland and global businesses continue to build and expand their operations.”

Sovereign Hong Kong can support clients through:

• Hong Kong company incorporation and redomicilation.
• Full corporate administration and management.
• Professional company secretarial and governance services.
• Accounting, HR, payroll and economic substance services.
• Integrated business and wealth structuring.

With Hong Kong’s strategic role strengthening, now is an ideal time for businesses and families to explore new opportunities in both the city and the wider Greater Bay Area. To learn how we can support your Hong Kong set-up or expansion, please contact us at below.

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Why a company secretary is required in Hong Kong

Understanding the requirements for a company secretary in Hong Kong is crucial for any business owner or director.

The role of a company secretary is to ensure that the company complies with all statutory financial and legal requirements under applicable laws and regulations in Hong Kong. These include, among others, the Companies Ordinance, Business Registration Ordinance and the Inland Revenue Ordinance.

The Companies Ordinance sets out clear guidelines to ensure that every company appoints a qualified and capable company secretary.

Who can act as a company secretary in Hong Kong

A company secretary can be either an individual or a corporate body. A company secretary who is a natural person must be aged 18 or above and must be ordinarily resident in Hong Kong. Company secretaries who are natural persons are only required to report their correspondence addresses to the Registrar of Companies instead of their usual residential addresses.

A company secretary who is a corporate entity must be a Hong Kong-registered company, or an overseas incorporated company registered in Hong Kong as a non-Hong Kong company, that has its registered office or principal place of business in Hong Kong.

If the secretary is a corporate entity, it must further hold a Trust and Company Service Provider (TCSP) licence issued by the Companies Registry.

A private local limited company must have at least one director who is a natural person and one company secretary. The Companies Ordinance expressly prohibits a sole director from acting as the company secretary of the same company. It also provides that no private company having only one director may have a body corporate as its company secretary if the sole director of that body corporate is also the sole director of the private company. If there are multiple directors, one director may take on the role of company secretary.

For listed companies, the requirements are even more stringent: the company secretary must be a member of the Hong Kong Chartered Governance Institute (HKCGI), a qualified solicitor or a certified public accountant.

The HKCGI, formerly known as The Hong Kong Institute of Chartered Secretaries (HKICS), is the only qualifying institution in the Chinese mainland and Hong Kong for the internationally recognised Chartered Secretary and Chartered Governance Professional qualifications.

Why many companies appoint a professional company secretary

Given the complexity and importance of the company secretary role, many companies choose to appoint a professional corporate services provider.

Sovereign Trust (Hong Kong) is a Hong Kong-registered company that has its registered office in Hong Kong. It holds a Trust and Company Service Provider (TCSP) licence issued by the Companies Registry.

We offer expert company secretarial services and registered office facilities to Hong Kong companies, ensuring that your business meets all statutory requirements and operates smoothly and compliantly.

Our company secretarial services include:

• Acting as named company secretary of the Hong Kong company
• Preparing annual returns and filing at the Companies Registry
• Preparing documents in respect of annual general meetings
• Keeping and updating statutory books and records
• Preparing documents in relation to share transfers
• Amending articles of association under Hong Kong law and filing at the Companies Registry
• Preparing documents and filing at the Companies Registry in respect of:
  • Change of director or company secretary
  • Change of registered office address
  • Change of name
  • Share allotment
  • Consolidation or subdivision of share capital

If you are unsure whether your current arrangements meet the legal requirements, or if you need help appointing a qualified company secretary, contact us today for a consultation.

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Companies, wherever they are based, are required to process employee salaries accurately and on time. They must also ensure their income tax and social security compliance in terms of withholding, calculations and reporting. Every country’s employment and tax system is different.

Payroll is more than a routine task – it’s a strategic function that impacts compliance, employee satisfaction and business reputation. This Guide explores why outsourcing payroll is a smart move for businesses operating in Hong Kong.

What Makes Payroll Management in Hong Kong So Complex?

Hong Kong’s payroll regulations are governed by the Hong Kong Employment Ordinance (Cap. 57), Inland Revenue Ordinance and the Mandatory Provident Fund Schemes Ordinance (MPFSO).

The Employment Ordinance is the primary legislation governing employment practices in Hong Kong. It sets out the rights and obligations of both employers and employees, covering key aspects such as wage payment, rest days, statutory holidays, paid annual leave, sickness allowance, maternity and paternity protections, and end of year payments. It also covers employment contracts, termination procedures, severance and long service payments, and protections against anti-union discrimination.

The Inland Revenue Ordinance is Hong Kong’s main tax law, governing taxes like salaries tax, profits tax and property tax. The salary tax system in Hong Kong employs a progressive tax rate structure that is applied to net chargeable income, calculated by subtracting deductions and allowances from total income.

Every employer in Hong Kong must submit a Form BIR56A return annually for the company, as well as individual annual returns (Form IR56B) for all employees, reporting all income regardless of whether they work in Hong Kong or overseas. Employers must submit also submit an IR56E form to the IRD within three months of a new employee’s start date to officially report their commencement of employment.

The Mandatory Provident Fund (MPF) is Hong Kong’s compulsory retirement savings scheme, which requires employers, employees and self-employed individuals to make regular contributions.

Employees who earn below HKD7,100 per month are exempt from contributions, but the employer must contribute 5% of the monthly income. For employees earning between HKD7,100 and HKD30,000 per month, both employer and employee must contribute 5%. For employees earning HKD30,000 or above per month, contributions are capped at HKD1,500 each for both employer and employee.

Employers must enrol employees in an MPF compliant scheme within 60 days of employment and make timely contributions. Adherence to the MPF regulations is critical for payroll compliance and also shows commitment to investing in your employees’ long-term financial future.

In addition to complying with tax reporting by filing employer’s and employee’s returns annually (Forms BIR56A and IR56B), and notifying the IRD of new hires, terminations or departures, employers must maintain accurate payroll records for at least seven years, including wage details, leave records, and MPF contributions.

How Is Payroll Set Up and Managed in Hong Kong?

The first stage will involve registering the employer and its employees with the local tax office and the government employment department, recording employment notices and contracts, obtaining bank details of the employer and employee and, finally, inserting all that information in the payroll system.

The payroll team must process the monthly payroll for salaried employees. It is responsible for creating, maintaining and updating all payroll data, which can include overtime, commissions, expenses, statutory sickness, maternity and other employee benefits.

Regular payroll tasks include calculating wages, deductions, and bonuses, updating records, managing timesheets and ensuring compliance with tax and employment laws. The payroll team will also assist employees with any payroll queries and liaise with tax authorities.

There is no legal requirement under the Employment Ordinance for employers in Hong Kong to provide payslips to employees, but it is a recommended practice. Payslips provide employees with a detailed breakdown of wages, including basic salary, overtime, allowances and deductions, allowing them to verify that they are being compensated correctly.

Accuracy comes from double-checking calculations, reconciling records regularly, understanding tax rules and keeping up to date with legislation changes. Payroll professionals must stay informed and apply updated labour, income tax, social security, pension and any other statutory rules at the right time. Failure to comply can lead to incorrect payments for employees, regulatory fines and penalties, and reputational damage.

Payroll also involves highly sensitive employee data, including employment records, salaries, tax and bank details. Confidentiality is crucial; access should be restricted and data should be handled in line with company policies and regulations under the Personal Data (Privacy) Ordinance, Cap 486 of the Laws of Hong Kong (PDPO).

If your Hong Kong company has an establishment in the European Union or European Economic Area (EEA) where personal data is processed, you must also comply with the EU’s General Data Protection Regulation (GDPR), which has extra-territorial application and imposes greater data protection obligations, as well as substantial penalties for violations.

Why Should Businesses Outsource Payroll in Hong Kong?

Staying on top of these payroll requirements can be challenging, especially for companies without dedicated HR or finance teams. Experienced payroll managers are well remunerated and will also require investment in systems.

Outsourcing your payroll, particularly when setting up business or expanding into a new market, can free up valuable time and resources, while also ensuring that all your obligations and responsibilities are met in a timely and efficient manner in every jurisdiction of operation.

Sovereign Trust (Hong Kong) provides a comprehensive but flexible outsourced payroll service that can be scaled and structured to a client’s specific requirements. You will able to submit data and access real-time payroll information via an online portal, and we will provide the payroll professionals and specialised software to process this information, including calculating wages, handling tax deductions and contributions, issuing payslips, making mandatory reports and managing pension schemes.

Outsourcing payroll to a trusted provider in Hong Kong offers several advantages:

• Expertise in local regulations – ensures full compliance and reduces risk.
• Timely, accurate payroll processing – enhances employee trust and satisfaction.
• Efficient management of MPF scheme ¬– MPF scheme set-up and trustee services, employee enrolment and monthly contribution submissions.
• Comprehensive record-keeping – supports Hong Kong audits and reporting.
• Scalable solutions – we can adapt and scale up our payroll solutions as your business grows.

Sovereign’s Accounting and Payroll Services are tailored to the unique needs of businesses in Hong Kong. Let us handle your payroll complexities so you can focus on what matters most – growing your business. Contact Sovereign Trust (Hong Kong) today for a customised payroll solution.

The post How to Outsource Payroll in Hong Kong: A Strategic Guide appeared first on The Sovereign Group.

Hong Kong has been ranked as the most international city in Asia in a new index compiled by global market research firm Ipsos and commissioned by the Hong Kong General Chamber of Commerce.

The inaugural ‘Asian Cities Internationality Index 2025’ was established to evaluate the internationality of 11 Asian cities – Bangkok, Ho Chi Minh City, Hong Kong, Jakarta, Kuala Lumpur, Mumbai, Seoul, Shanghai, Singapore, Taipei and Tokyo.

Out of a maximum score of 100, Hong Kong ranked first, with a score of 73.7, followed closely by Singapore at 73.5. The Index recognised Hong Kong’s position as an international financial hub, a centre for international events and an international hub for world-class education, as well as its free, safe, and stable living environment. Singapore was highlighted as a multicultural city that nurtures a diverse talent pool.

The Index measured 113 indicators in seven areas: Business & Economy, Quality of Life, Infrastructure & Connectivity, Innovation & Ideas, Human Capital Diversity, Cultural Interaction, and Government & Legal System for Business.

These included 69 statistical indicators from various national and international sources, and 44 indicators gathered from a survey of 1,107 business executives residing in these cities – both local and expats – to provide a broad spectrum of insights.

Tokyo and Seoul formed the next tier. Tokyo (70.0) was found to excel in quality of life, cultural interaction and international presence, while Seoul (69.4) rated highly in advanced transportation and information connectivity.

They were followed by Shanghai (65.1), Bangkok (61.3), Kuala Lumpur (60.7), Taipei (57.9), Jakarta (55.5), Ho Chi Minh City (53.9) and Mumbai (53.1). Shanghai led in innovation with its vibrant innovation ecosystem. Other cities’ unique strengths included tourism appeal, diverse educational resources and accessibility of information, but they were found to have not fully elevated their international standing.

According to the Chamber, Hong Kong’s top ranking was powered by its lead in the Business & Economy segment. But it placed fourth in Innovation & Ideas, trailing Shanghai, Singapore and Seoul, a weakness that had to be addressed if it was to secure its future amid rising geopolitical risks.

Chamber chief executive Patrick Yeung Wai-tim said Hong Kong’s development had not yet reached the point where its scientific research could successfully be commercialised on a large scale. “Hong Kong’s own enterprises still invest a relatively low proportion of their operational costs in scientific research and development,” he said.

To improve Hong Kong’s performance, the Chamber recommended providing “more investor-friendly policies to support commercialisation of local academic research”. It also urged action to “foster a balanced and diverse talent pool and improve the deteriorating English proficiency of the working population”, after Singapore led the Human Capital Diversity category.

“This new ranking not only highlights Hong Kong’s strength as an international finance centre, but also as a place that offers world-class education and a great place to do business. Similarly, Singapore has been recognised as a multicultural city with a growing tech and innovation hub,” said Alan Fong, Sovereign Managing Director – Asia.

“Asia is at the forefront of technology and innovation, and this has created the perfect ‘ecosystem’ for investors and individuals to start or grow a business. It should also be noted that Hong Kong and Singapore were ranked third and fourth respectively in the latest Global Financial Centres Index (GFCI) report. This means that, including Shanghai, Shenzhen and Seoul, there are now five Asian cities in the top ten.”

In another survey, the International Institute for Management Development (IMD) recently ranked Hong Kong third globally in its annual World Competitiveness Index, behind Switzerland and Singapore.

According to the IMD, Switzerland continued to demonstrate a robust performance, a result of the country’s resilient and stable economic and societal structures. It continued to lead globally in Government Efficiency and Infrastructure, maintaining its first position in both areas.

Singapore slipped to second from its top position in 2024. Singapore’s top rank in Economic Performance was mainly the result of high growth in GDP and capital formation, as well as notable improvements in the export of goods and commercial services. This combined drive in the Domestic Economy and International Trade subfactors was significant enough to offset slight declines in International Investment (from second to third) and Employment (from fifth to sixth).

Hong Kong SAR advanced two positions to secure third place, up from fifth in 2024, with gains across all four factors of competitiveness. These gains, said the IMD, reflected a broad-based approach to attracting private sector investment.

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As an adviser in the trust industry, among the most frequently asked questions I get are “What is the best location in which to establish my family trust?” and “Is Hong Kong a safe place in which to establish my trust?”, writes Alan Fong, Sovereign Trust Managing Director – Asia.

I am obviously biased and, naturally, my answer to the first question is “Hong Kong” and to the second is “Of course”. But don’t get me wrong, my answers are not blindly based on my emotional and commercial attachments to Hong Kong; they simply reflect my confidence in the strengths of Hong Kong as a trust jurisdiction.

Hong Kong as a leading trust jurisdiction

The initial enactment of Hong Kong’s trust law dates back to 1934, when the Trustee Ordinance (Cap. 29) was first introduced. This legislation was modelled closely on English trust law, reflecting Hong Kong’s then status as a British colony, and it laid the foundations of the legal framework governing trustees, their powers, duties, and the administration of trusts.

A modern legal framework with enhanced control and protection

In 2013, there was a timely overhaul. The Trust Law (Amendment) Ordinance modernised trustee powers and introduced a statutory duty of care for trustees, as well as allowing settlors to reserve investment powers for themselves without invalidating the trust. This provides settlors of a Hong Kong trust with a high degree of control over how trust assets are invested, ensuring that their investments can align with their financial objectives.

Importantly, it also abolished the rule against perpetuity, which previously required trusts in Hong Kong to last for no more than 80 years, and introduced forced heirship protections. This makes Hong Kong an attractive location for estate planning, as settlors can place assets into a Hong Kong trust and be assured those assets will be managed according to the trust’s terms rather than according to forced heirship rules.

These changes highlight the evolving nature of trust legislation in Hong Kong. It is aligned with modern estate and legacy planning needs and the amendments served to reinvigorate Hong Kong as a highly competitive global trust jurisdiction and to enhance its status as an international asset management centre.

Hong Kong, which is a Special Administrative Region of the People’s Republic of China (sharing a similar status to Macau), operates under the principle of “One Country, Two Systems”. This means that Hong Kong continues to operate under common law and the Hong Kong courts continue to apply English case law in trust matters.

This ensures a high level of confidence in the legal framework and the effective protection of assets. English is also the business and legal language of Hong Kong and is used alongside Chinese for doing business within the Chinese-speaking countries of the Asian region. English is the language used in commercial contracts.

Further, as part of the wider Greater Bay Area project, the Qianhai Shenzhen-Hong Kong Modern Service Industry Co-operation Zone is designed to integrate Hong Kong’s legal, financial and economic systems with Shenzhen’s mainland framework, fostering a unique cross-border collaborative environment.

A global financial centre supporting trust structures

Hong Kong’s strong, legal framework has been a major contributing factor in enabling Hong Kong to reclaim its title as Asia’s top international finance centre (and third globally behind New York and London). Another, is the strength of its financial services ‘eco-system’, which offers an exceptionally deep pool of professionals with expertise in legal, fiduciary and wealth management services.

This means that Hong Kong isn’t just a trust jurisdiction; it’s a strategic platform for legacy planning, asset managment and global wealth mobility. It has a robust regulatory framework that is aligned with global standards and can be used by families, regardless of their nationality or place of residency, as the ideal location for establishing a trust.

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Hong Kong’s Belt and Road Office signed a memorandum of understanding with Saudi Arabia on 29 August to enhance information exchange in infrastructure and construction, as well as to facilitate the entry of Hong Kong professional services into the Saudi market.

The MoU was signed in Hong Kong by Commissioner for Belt and Road Nicholas Ho Lik-chi and Assistant Deputy for the Saudi Services Sector Fahad Alhashem and witnessed by Hong Kong Chief Executive John Lee Ka-chiu and Saudi Minister of Investment Khalid Al-Falih.

Under the agreement, the Belt and Road Office will share information on Hong Kong’s professional services with Ministry of Investment of Saudi Arabia (MISA) to support investment promotion, tendering and fundraising activities.

MISA, in turn, will provide information on infrastructure and construction projects, and help Hong Kong companies overcome potential challenges when entering the Saudi market.

Lee described the agreement as a significant milestone in collaboration between the two sides under the Belt and Road Initiative (BRI), saying that it is the first agreement between Hong Kong and an overseas economy focusing on infrastructure and construction.

He emphasised Hong Kong’s strategic advantages in supporting Saudi Arabia’s Vision 2030, which aims to develop extensive infrastructure projects to diversify the country’s economy away from oil and improve the quality of life. As a leading international hub for finance, shipping and trade, as well as a fast-rising international innovation and technology centre, he said Hong Kong was well-positioned to contribute to the ambition.

Hong Kong and Saudi Arabia are also currently negotiating an Investment Promotion and Protection Agreement to protect, enhance and open investment flows between the two economies.

“As we prepare for the tenth anniversary of the Belt and Road Summit that will be open in Hong Kong on 10 September, the agreement between the Kingdom of Saudi Arabia and Hong Kong is another significant step towards the growing relationship between the two states,” said Alan Fong, Sovereign Trust (Hong Kong) Managing Director – Asia.

“This closer collaboration brings mutual economic benefits and true alignment between the Belt and Road Initiative and Saudi Arabia’s Vision 2030. Sovereign has offices in both Hong Kong and Saudi and will be represented in the Global Investment Zone at the Summit. Please visit us to learn more about our services and how we can help you expand your business across the Asia and Gulf regions.”

Hong Kong has been working to build ties with the Middle East in a bid to attract investments as the growing partnership between the Gulf Cooperation Council (GCC) and dynamic Asian economies gains momentum. In May, a Hong Kong delegation led by Lee signed 35 memorandums of understanding and agreements to deepen cooperation with Qatar, ranging from investment to innovation and technology, with city residents also given 30-day visa-free access to the Gulf nation.

China is a key driver. GCC-China trade has risen by around 50% over the last decade and now almost matches the GCC’s combined trade with the US, UK, and Western Europe.

Al-Falih had earlier led a Saudi delegation on an official visit to China where he met China’s Commerce Minister Wang Wentao in Beijing. Bilateral trade exceeds USD100 billion annually, making China the Kingdom’s largest trading partner.

Chinese customs data showed that while the Asian country exported over USD50 billion worth of goods to the Kingdom in 2024 – including smartphones, solar panels and saloon cars – Saudi exports to China totalled USD57 billion, over 80% of which was oil.

The ministers discussed strengthening cooperation in global trade and boosting direct investment across several sectors. The meeting also saw the signing of the minutes of the Saudi-China Trade, Investment and Technology Committee.

China is ready to align the BRI with Saudi Arabia’s Vision 2030, expand bilateral trade, enhance two-way investment, and broaden cooperation in areas such as new energy, supply chains and capital markets, to further strengthen economic ties, Wang said.

Al-Falih said that China is a key strategic partner for Saudi Arabia. Riyadh is ready to deepen trade cooperation, support Saudi companies in expanding investment in China, and welcome more Chinese companies to invest in Saudi Arabia. The two countries will strengthen practical cooperation in advanced manufacturing, new energy, supply chains and industrial parks, further enriching their comprehensive strategic partnership.

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Yes. Under the Companies Ordinance (Cap. 622), every Hong Kong company – whether private or public – is required to appoint a company secretary. This is not just a formality; a company secretary is the guardian of the company’s proper compliance with both the law and best practice.

A company secretary is the most senior administrative officer of a company or organisation. With the increasing focus in recent years on corporate governance, the role of the company secretary has grown in importance.

Their role is to ensure that the company complies with all statutory financial and legal requirements under applicable laws and regulations. These include, among others, the Companies Ordinance, Business Registration Ordinance and the Inland Revenue Ordinance. The duties a company secretary will undertake are wide ranging and will generally include the following:

• Maintaining the company’s statutory books, including:
  • Register of present and past directors and secretaries.
  • Register of all shareholders, past and present, and their respective shareholdings.
  • Register of any charges on the company’s assets.
  • Minutes of general meetings and board meetings.
• Preparing and filing annual returns at the Hong Kong Companies Registry. Other documents which must be filed include the directors’ report and auditors’ report, where applicable, and financial statements, including details of the company’s assets and liabilities.
• Remind the directors to prepare the financial statements of the company, have them audited and approved annually at the annual general meeting of the company. These statements then have to be filed with the tax return of the company with the Inland Revenue Department for all business, whether within or outside Hong Kong.
• Other corporate filings include information of and about directors and officers, any increase of authorised or paid-up capital and reporting of the passing of ordinary and special resolutions.
• Arranging meetings of the directors and the shareholders, which involves the issue of proper notices of meetings, preparation of agenda, circulation of relevant papers and taking and producing minutes to record the business transacted at the meetings and the decisions taken.
• Informing the Companies Registry of any significant changes in the company’s structure or management, such as the appointment or resignation of directors.
• Establishing and maintaining the company’s registered office as the address for any formal communications and ensuring that all the company’s business communications (stationery, website, emails, order forms and invoices) carries its name, registered number and registered address.
• Ensuring the security of the company’s legal documents, such as the certificate of incorporation and the memorandum and articles of association.
• Deciding on the company’s policy for the filing and retention of documents.
• Advising directors on their duties and ensuring that they comply with corporate legislation and the articles of association of the company.

The risks of non-compliance with local regulations can be significant, with the potential for harsh consequences for organisations and individuals. It is essential to know that your entities, wherever they are located around the world, are in good standing, that business decisions are accurately implemented and that necessary changes can be effected in a straightforward and timely manner.

For public companies the company secretary will also be responsible for compliance with the requirements of the Stock Exchange of Hong Kong (SEHK), management of the company’s registrars and compliance with the Corporate Governance Code.

A company secretary will often be required to take on a variety of additional administrative duties, such as: insurance, company pension scheme, administration of share schemes, payroll, management of the company’s premises and facilities, compliance with data protection and health and safety requirements, and registering and maintaining intellectual property (IP).

Failing to appoint a company secretary or neglecting their duties can result in penalties, fines and even legal action against the company and its officers. For this reason, many businesses in Hong Kong choose to engage professional Corporate Service Providers like Sovereign Trust (Hong Kong). Our experienced team will ensure that your company remains compliant, allowing you to focus on growth and operations.

Appointing a company secretary in Hong Kong is not only mandatory, it is also essential for the smooth and lawful running of your business. If you need guidance or wish to outsource this critical function, Sovereign Trust (Hong Kong) is able to assist.

The post Is there a requirement for a Company Secretary in Hong Kong? appeared first on The Sovereign Group.

Two of the world’s biggest insurers and pension providers, France’s AXA and Canada’s Manulife, have both announced plans to redomicile their China region headquarters from Bermuda to Hong Kong under the new company re-domiciliation regime introduced by the Hong Kong Special Administrative Region on 23 May.

The re-domiciliation process enables companies to reregister in Hong Kong while retaining their legal identity and business continuity. Previously, they were required to undertake the complex process of winding up their operations in their existing place of registration before transferring the assets and transactions to a new Hong Kong entity.

The new re-domiciliation regime allows businesses to move to Hong Kong without having an impact on the continuity of the company’s legal entity, organisational structure, or daily operations. The existing rights and obligations of policyholders, distributors or business partners remain unaffected, and all existing agreements and commitments can continue in full force and effect.

The new law came at a time when changes to global tax laws had also made traditional offshore financial centres like Bermuda and the Cayman Islands less appealing to multinational businesses. Under the OECD’s Global Base Erosion (GloBE) rules, multinational enterprises (MNEs) with consolidated global annual revenues of more than €750 million are required to pay a minimum 15% tax on their profits in each jurisdiction in which they operate.

In addition to AXA and Manulife, a further 10 large insurers in Hong Kong are currently incorporated in Bermuda. Before the GloBE rules were implemented, companies based in Bermuda paid no corporate income tax. Another historic reason for this concentration was that, until 2006, Hong Kong imposed estate duty at rates up to 50% on assets, including funds and insurance policies, that were passed on to beneficiaries. Insurance policies sold in Hong Kong by companies domiciled outside Hong Kong were not however in scope.

AXA Hong Kong & Macau announced that, subject to regulatory approvals, it intended to re-domicile AXA China Region Insurance Company (Bermuda) Ltd (ACRIB) from Bermuda to Hong Kong under the new company re-domiciliation regime. Upon completion of the process, ACRIB will be renamed as AXA China Region Insurance Company (Hong Kong) Ltd.

“We are excited to be among the first to re-domicile to Hong Kong. This move is not merely administrative; it is a significant step forward in deepening our roots in Hong Kong and simplifying our reporting and compliance processes,” said AXA Greater China Chief Executive Officer Sally Wan.

“I firmly believe it will provide strategic advantages that position us for long-term success in one of the world’s most vibrant markets. By leveraging Hong Kong’s robust financial ecosystem and its increasing importance as a regional insurance hub and a global risk management centre, we look forward to capturing the opportunities arising from the region and achieving greater success in the future.”

Manulife (International) Ltd (MIL), the Hong Kong and Macau unit of Toronto-headquartered Manulife Financial and currently the biggest pension provider in Hong Kong, also announced in June that it plans to redomicile from Bermuda to Hong Kong in November. It said in a customer notice that its decision reflected confidence in Hong Kong as a premier international financial hub.

“Redomiciling to Hong Kong allows us to better align with the city’s robust financial and regulatory environment, strengthening our ability to meet local market needs,” said MIL chief executive Patrick Graham.

This makes Manulife (International), the Hong Kong and Macau unit of Toronto-headquartered Manulife Financial, the second insurer to incorporate in Hong Kong after a new “game changer” law easing the redomiciliation process. Rival AXA announced a similar move soon after the change.

The legislation allows companies to establish themselves in the city while retaining their legal identity and business continuity. Previously, a redomiciling company had to wind up its existing entity and shift all assets and transactions to Hong Kong.

Manulife said in a customer notice that its decision reflected confidence in Hong Kong as a premier international financial hub. The Canadian insurer already gets 44% of its earnings from Asia, with the region’s contribution projected to reach 50% by 2027.

“Redomiciling to Hong Kong allows us to better align with the city’s robust financial and regulatory environment, strengthening our ability to meet local market needs,” said Patrick Graham, CEO of Manulife Hong Kong and Macau.

Hong Kong’s insurance business is predicted to expand by a compounded 55% over the next eight years, according to industry forecasts, driven by the so-called ‘silver economy’ serving senior citizens and growth in the Greater Bay Area (GBA). Gross insurance premium is projected to reach USD127 billion by 2032 from last year’s USD82 billion.

The GBA – a cluster of 11 cities around southern China’s Guangdong province, including Hong Kong and Macau – has a combined economy of almost USD2 trillion but only 3.5% of the total population of 86 million people in the region currently has health and life insurance. According to data from the Hong Kong Insurance Authority, the sale of new life policies leapt 21.4% last year to a record USD28.34 billion, of which 28.6% were bought by mainland residents.

“I am pleased that some companies have already indicated they are actively preparing to apply for redomiciliation to Hong Kong,” said Secretary for Financial Services and the Treasury Christopher Hui Ching-yu, who led a roadshow to several Canadian cities last month.

“The ongoing uncertainties in global political and economic situations, as well as developments in international market regulations, have further highlighted Hong Kong’s advantages,” he added.

“As an international financial centre, Hong Kong has a world-class infrastructure with excellent resources to support businesses, in a strongly regulated but business-friendly environment. However, the primary advantage for businesses redomiciling to Hong Kong is to gain access to one of the world’s largest markets, China,” said Sovereign Trust (Hong Kong) Managing Director Alan Fong.

“AXA and Manulife have both made the strategic decision to redomicile to Hong Kong, so they can capture and meet the growing demand for insurance products and services from the Chinese market. However, there will also be significant positive knock-on effects for the Hong Kong economy, through the creation of jobs, the development of new skills and expertise, and the increased demand for professional services.”

Overseas companies that are interested in moving their domicile to Hong Kong will need to assess whether they meet the eligibility criteria for the new regime. They must be of company type that is the same (or substantially the same) as the four specified types of companies under Hong Kong’s Companies Ordinance (CO), and outward re-domiciliation must be permitted under the laws of their current domicile. Regulated financial institutions such as insurers must also obtain prior clearance from the Hong Kong banking or insurance regulator in advance of any re-domiciliation application.

Sovereign Trust (Hong Kong) can help with all aspects of redomiciling to Hong Kong. Upon re-domiciliation, a company will generally be required to comply with Hong Kong law in the same way as a locally incorporated company. For further information or assistance, please contact Alan Fong.

The post Two global insurers redomicile to Hong Kong using ‘game-changing’ new law appeared first on The Sovereign Group.

What is Transfer Pricing and how does it apply in Hong Kong?

Transfer pricing is the term used to describe all aspects of intercompany pricing arrangements between related business entities, such as a Hong Kong business and an overseas branch. Related parties include not only parties within the same group, but also parties which have a link of direct or indirect control, including control over the board of directors.

Transfer pricing rules generally apply to intercompany transfers of tangible assets, which include fixed assets such as machinery, building and land, and current assets such as inventory and cash, as well as transfers of intangible property, which includes intellectual or legal rights.

Hong Kong’s Inland Revenue Department (IRD) sets transfer pricing rules to ensure that prices used by connected companies are in line with the prices that unconnected companies would charge under comparable circumstances. In other words, that they are priced at real market value. This prevents companies from shifting profits to low-tax countries to avoid tax.

Why are Transfer Pricing rules critical for Hong Kong businesses?

Intercompany transactions across borders are growing rapidly and are becoming much more complex. Hong Kong’s transfer pricing rules, introduced in 2018, follow global standards set by the Organisation for Economic Co-operation and Development (OECD).

To achieve a fair division of taxing profits across jurisdictions and to address international double taxation, OECD member countries have agreed that transactions between connected parties should be treated for tax purposes by reference to the amount of profit that would have arisen if the same transactions had been executed by unconnected parties. This is known as the ‘arm’s length’ principle.

What is the arm’s length principle under Transfer Pricing?

Under Transfer Pricing rules, the arm’s length principle is applied to a controlled transaction by theoretically replacing the actual terms under which a transaction was executed, with ‘arm’s length terms’. And then, for tax purposes, recalculating the profits accordingly.

The OECD Transfer Pricing Guidelines advise on the choice and application of the most appropriate transfer pricing methodology in any given case. The methods that can be used to determine the arm’s length price are:

• Comparable Uncontrolled Price Method (CUP)
• Resale Price Method (RPM)
• Cost Plus Method (CPM)
• Transactional Net Margin Method (TNMM)
• Profit Split Method (PSM)

The complexities of applying the arm’s length principle in practice should not be underestimated. Because of the closeness of the relationship between the parties there can be genuine difficulties in determining what arm’s length terms would have been, especially where it is not possible to find wholly comparable transactions between unconnected parties. There are many factors to take into account.

How does Hong Kong’s Transfer Pricing regime operate?

Hong Kong operates with two sets of Transfer Pricing rules:

• Rule 1 – Requires that transactions between associated companies are to be calculated on an arm’s-length basis. The IRD is empowered to impose TP adjustments either on income or expenses arising from domestic or cross-border related-party transactions that are not entered into on an arm’s-length basis and that result in a potential Hong Kong tax advantage.Domestic related party transactions are exempt if there is no actual tax difference and they meet the conditions for domestic nature, non-business loan and no tax avoidance.
• Rule 2 – Requires the attribution of profits of a non-Hong Kong resident company to its permanent establishment in Hong Kong as if the permanent establishment were a distinct and separate enterprise, under the OECD’s separate enterprises principle. To determine whether the relevant profits are arising in or derived from Hong Kong, and therefore subject to Hong Kong profits tax, the IRD will assess how the profits were earned and where the operations were performed.

What Transfer Pricing documentation must Hong Kong entities prepare?

Transfer pricing documentation is intended to provide a summary of the global supply chain and the identification of the value drivers. It is important to document how value is generated by the group as a whole, the interdependencies of the functions performed by the associated enterprises within the group, and the contributions that the associated enterprises make to that value creation.

Businesses are required to demonstrate, for tax purposes, that the terms of any transaction between connected parties has been executed at ‘arm’s length’. To achieve this, the Hong Kong transfer pricing rules mandate Hong Kong entities to prepare transfer pricing documentation – ‘Master File’, ‘Local File’ and ‘Country-by-Country Report’ (CbCR).

• A Master File contains high-level information on the group’s global business operations and its transfer pricing policies.
• A Local File sets out the economic characteristics of the related party transactions of the Hong Kong entity, the amounts involved, and the transfer pricing analysis demonstrating that the pricing applied to each class of transactions is arm’s length.
• Following the threshold set by the OECD, multinational enterprises (MNEs) with annual consolidated group revenue of €750 million or more, and where the ultimate parent company resides in Hong Kong, are required to file CbCRs in Hong Kong. A CbCR provides an overview of the global allocation of income, profits, taxes paid, and other economic indicators for each country in which a group operates. This assists the tax authorities to identify and assess transfer pricing risks.

This three-tiered standardised approach requires a Hong Kong entity to set out and execute a consistent transfer pricing policy and provides the Assessor with useful information for assessing transfer pricing risks.

Which companies are exempt from Hong Kong’s Transfer Pricing requirements?

The transfer pricing regime contains certain exemption thresholds based on the business size and the volume of different types of related-party transactions. A Hong Kong company is not required to prepare the Master File and the Local File if:

• Aggregated revenue is below HSD400 million.
• Assets under HSD300 million.
• Fewer than 100 employees.

If two of these three conditions cannot be satisfied, there is a further exemption based on the volume of controlled transactions, if they do not exceed:

• HSD220 million on transfers of properties, excluding financial assets and intangibles.
• HSD110 million on transactions in respect of financial assets.
• HSD110 million on transfers of intangibles.
• HSD44 million on other transactions, such as services or royalties.

Even if a Hong Kong company meets the exemption thresholds and is not required to prepare Master File and Local File for the relevant accounting year, the company is still required to comply with the Transfer Pricing Rule 1. Maintaining comprehensive transfer pricing documentation can serve as a defence for transfer pricing treatment and mitigate penalties in tax or transfer pricing audits.

What’s new in 2025?

In 2025, Hong Kong is expected to strengthen its transfer pricing regime to align with global tax trends. Here are the key updates:

• Global Minimum Tax – The Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Ordinance 2025 was enacted on 6 June 2025. This will apply the OECD’s global minimum tax of 15% on MNE groups with annual consolidated revenue of €750 million or above, but also it updates Hong Kong’s transfer pricing rules to align with the 2022 OECD transfer pricing guidelines.
• Stricter IRD reviews – More scrutiny is being paid to intra-group transfer prices. It is anticipated that the IRD will conduct transfer pricing reviews and audits on taxpayers on a larger scale and on a more regular basis. The IRD may request taxpayers to submit Form IR1475, which summarises the key transfer pricing information contained in the Master File and Local File. This is used to assess if the business under review is follow transfer pricing rules. It must be submitted to the IRD within one month of a request.
• Advance Pricing Arrangements (APAs) – It is anticipated that more taxpayers will use the IRD’s APA programme, which provides a mechanism for taxpayers to reach an agreement on prospective transfer pricing arrangements. APAs can be unilateral (only with Hong Kong’s IRD), bilateral (with the IRD and another country’s tax authority) or multilateral (with more than two countries).

How should businesses manage Transfer Pricing compliance in practice?

As the IRD, in line with revenue authorities in other jurisdictions, increases scrutiny of transfer pricing, companies should review their transfer pricing strategies in the context of a transfer pricing examination. Resolving transfer pricing disputes can be difficult because of the subjective nature of the transactions and the significant domestic and cross border tax implications.

Multinational groups in Hong Kong, or any enterprises with intercompany activities, should therefore:

• Work with your group – The harmonisation of transfer pricing documentation into an OECD-compliant Master File and Local File requires additional efforts from multinational groups. If the Master File is prepared by your overseas parent, you should ensure that the IRD gets the right information because the IR1475 might request group details.
• Keep clear and comprehensive records – you should always document all aspects of intercompany pricing arrangements to support transfer pricing decisions. Failure to maintain sufficient documentation can lead to tax adjustments and penalties.
• Apply appropriate transfer pricing methods – transfer pricing methods should be based on the specific facts and circumstances of their transactions. Using methods that don’t reflect the economic substance of a transaction could be problematic.
• Review transfer pricing policies – transfer pricing policies should be revisited periodically, especially when there are changes in market conditions or a group restructure.
• Start early – since the IR1475 demands a quick response, prepare your files as soon as possible after your accounting year ends.
• Consider Advance Pricing Arrangements (APAs) – APAs provide greater certainty in cross-border transactions and minimise potential legal and compliance costs associated with transfer pricing issues.
• Check for IRD updates – recent developments in the IRD’s approach to transfer pricing highlight the importance of staying on top of evolving tax regulations. Visit the IRD website (www.ird.gov.hk) for new guidelines or forms.

How can Sovereign support with Hong Kong Transfer Pricing?

The Hong Kong transfer pricing regime contains exemption thresholds based on the business size and the volume of different types of related-party transactions. Domestic related-party transactions can also be excluded from the transfer pricing obligation if they meet certain conditions.

Our specialist Accounting Team in Hong Kong can assess your Hong Kong entity and examine any related-party transactions to see if you are in scope. The Profits Tax return and Supplementary Form S2 requires to taxpayer to make a declaration as to whether it is required to prepare a Master File and a Local File.

For in-scope entities, we can assist with the preparation of the Master File and Local File, which must be prepared no later than nine months after the end of the accounting period. Both should be ready for submission upon request by the IRD.

If the IRD decides to conduct a review, it will request the taxpayer to complete Form IR1475, which summarises the key transfer pricing information contained in the Master File and Local File. This must be submitted within one month of the request.

If a selected entity has not declared in its Supplementary Form S2 that a Master File and Local File are required to be prepared, the entity may be requested to provide a detailed explanation on how the conditions for the exemption are satisfied.

Failing to submit the IR1475 or including errors can lead to prosecution and fines of up to HKD100,000, as well as tax adjustments. The IRD may also audit your business.

Case Studies

To further assist with understanding Hong Kong’s Transfer Pricing regime, we have created the following two illustrations:

Case Study 1: Company requires both Master File and Local File

Company: TechTrend Ltd.

Business: TechTrend Ltd is a Hong Kong subsidiary of a US-based multinational tech group that develops software and sells licences globally. TechTrend Ltd in Hong Kong provides marketing services and licenses software to its parent company and subsidiaries in Singapore and China.

Details:

• Global Revenue: the parent company’s global revenue is €1 billion (about HKD9 billion), exceeding the IRD’s threshold of HKD6.8 billion for transfer pricing documentation.
• Hong Kong Operations:
  • Annual revenue HKD600 million (above the HKD400 million exemption threshold).
  • Total assets HKD350 million (above the HKD300 million exemption threshold).
  • Employees 120 (above the 100-employee exemption threshold).
• Related-Party Transactions:
  • TechTrend Ltd pays HKD150 million to the US parent for software development services.
  • It earns HKD200 million from licensing software to the Singapore subsidiary.
  • It provides marketing services worth HKD120 million to the China subsidiary.
  • Total related-party transactions are HKD470 million (exceeds exemption thresholds for goods, services and intangibles).

Result:

•  Group Size – the parent company’s global revenue (€1 billion) is above the IRD’s HKD6.8 billion threshold, so TechTrend Ltd must prepare a Master File to describe the group’s operations and transfer pricing policies.
• Hong Kong Size – TechTrend Ltd exceeds two of the IRD’s exemption thresholds (revenue and employees), so it cannot claim an exemption.
• Transaction Volume – The related-party transactions (HKD470 million) exceed the IRD’s exemption limits:
  • Goods – HKD220 million (not applicable here, but services and intangibles apply.
  • Services – HKD110 million (HKD120 million for marketing services exceeds this).
  • Intangibles: HKD110 million (HKD200 million for software licensing exceeds this).

Actions:

• Master File and Local File – under the Inland Revenue Ordinance, TechTrend Ltd must prepare both Master File and Local File within 9 months of its accounting year ends (by 30 September 2025, for a 31 December 2024 year-end).
• IR1475 – if the IRD requests an IR1475 form, TechTrend Ltd must summarise these files and submit within one month, to demonstrate fair pricing.
  How Sovereign can assist:
• Sovereign can ensure the files meet IRD standards (per Departmental Interpretation and Practice Notes No. 58) and use data from the US parent for the Master File.
• If the IRD makes an IR1475 request, Sovereign can assist by summarising the Master File and Local File and will ensure submission within one month.

Case Study 2: Company exempt from Master File but requires Local File

Company: Sunny Retail Ltd.

Business: Sunny Retail Ltd is a Hong Kong company owned by a Singapore parent company. It runs a chain of small clothing stores in Hong Kong and buys inventory from its Singapore parent.

Details:

• Global Revenue – the Singapore parent’s global revenue is €500 million (about HKD4.5 billion), below the IRD’s HKD6.8 billion threshold for mandatory Master File preparation.
• Hong Kong Operations:
  • Annual revenue: HKD200 million (below the HKD400 million exemption threshold).
  • Total assets: HKD150 million (below the HKD300 million exemption threshold).
  • Employees: 80 (below the 100-employee exemption threshold).
• Related-Party Transactions:
  • Sunny Retail Ltd buys clothing worth HKD250 million from the Singapore parent.
  • No other related-party transactions (no services or intangible assets).
• Transaction Volume:
  • Goods: HKD250 million (exceeds the HKD220 million exemption threshold for goods).
  • Services: Not applicable
  • Intangibles: Not applicable

Result:

• Group Size – the parent’s global revenue (HKD4.5 billion) is below the IRD’s HKD6.8 billion threshold, so Sunny Retail Ltd is exempt from preparing a Master File.
• Hong Kong Size – Sunny Retail Ltd meets the exemption thresholds for company size, which supports not needing a Master File.
• Transaction Volume – related-party goods transactions (HKD250 million) exceed the IRD’s exemption limit for goods (HKD220 million), which means Sunny Retail Ltd must prepare a Local File to document these transactions, even though it’s exempt from the Master File.

Actions:

• Local File – under the Inland Revenue Ordinance, if any related-party transaction exceeds the threshold a Local File is required, but the Master File exemption applies if group revenue is below HKD6.8 billion and local thresholds are met.
• IR1475 – if the IRD sends an IR1475 form, Sunny Retail Ltd must submit details of the clothing purchases, referencing the Local File. It must do this within one month.

How Sovereign can assist:

• Sovereign can assist by creating the Local File, using invoices and contracts. Complex group data is not required because the Master File is exempt.
• If the IRD makes an IR1475 request, Sovereign can assist in summarising Local Files and will ensure submission within one month.

The post Understanding Hong Kong’s Transfer Pricing Framework and 2025 Changes appeared first on The Sovereign Group.