Government refines its legislative approach to Pillar Two

In a recent paper submitted to the Legislative Council Panel on Financial Affairs (the Paper), the Government has summarized its responses to the views received on its earlier consultation paper on the implementation of the global minimum tax and the Hong Kong minimum top-up tax (HKMTT) in Hong Kong.

Having regard to the feedback received, the Government indicates that it will refine certain features of the legislation for the implementation of the global minimum tax (referred to below as “top-up tax”) and the HKMTT, including the following:

(a) Implement the Income Inclusion Rule (IIR) and the HKMTT from 2025, while the Undertaxed Profits Rule (UTPR) will be implemented later subject to further studies, having regard to the implementation timelines of other jurisdictions. The legislation, to be enacted in 2025 with retrospective effect from 1 January 2025, will be contained in a separate part of the Inland Revenue Ordinance (IRO);

(b) Introduce a definition of “Hong Kong resident entity” into the IRO for general purposes, instead of the previous proposal that the definition be only applicable to the top-up tax and the HKMTT;

(c) Exclude investment entities and insurance investment entities from the scope of the HKMTT to preserve tax neutrality for these entities;

(d) Exclude the general anti-avoidance provisions contained in sections 61 and 61A of the IRO from being applicable to the top-up tax and the HKMTT. Instead, a main purpose test would be included as a general anti-avoidance provision in the top-up tax and the HKMTT legislation;

(e) Set the time limit for raising a tax assessment under the GloBE rules to be six years from the later of (i) the end of the fiscal year or (ii) the time when the non-assessment or under-assessment has come to the knowledge of the assessor; and

(f) Explore administrative arrangements for a “clean exit” where a constituent entity (CE) subject to the joint and several liabilities of the top-up tax under the UTPR and the HKMTT of a multinational enterprise (MNE) group leaves the group, i.e., after leaving the group, subject to the satisfaction of specified conditions, the CE could be released from the joint and several liabilities. Such administrative arrangements would undoubtedly facilitate MNE groups undertaking merger and acquisition transactions.

The Government also indicates that generally the respondents supported the implementation of the HKMTT that would qualify as a Qualified Domestic Minimum Top-up Tax (QDMTT) under the Global Anti-Base Erosion (GloBE) rules such that in-scope MNE groups may benefit from the QDMTT safe harbor. Where the QDMTT safe harbor is applicable, the top-up tax payable by these MNE groups under the GloBE rules in Hong Kong would be deemed to be zero.

For the full responses of the Government to the views received on major issues, Appendix B to the Paper is reproduced in full in the Appendix to this alert.

Clients who have any questions on how the refined legislative approach could impact their top-up tax and HKMTT planning can contact their tax executives.