Implementation of Pillar Two minimum tax deferred to 2025

24 February 2023

Hong Kong’s Financial Secretary, Mr Paul Chan, delivered the 2023/24 Budget Speech on 22 February 2023. While the majority of the budget initiatives focus on support for the general public and small and medium-sized enterprises, several proposals will be of interest to companies doing business in Hong Kong, including the following (click here BDO Hong Kong’s overall analysis of the budget proposals):

No changes are proposed to the existing 8.25%/16.5% profits tax rates for companies or the 7.5%/15% rates for unincorporated businesses.
The implementation of a 15% global minimum tax on large multinationals (i.e., those with consolidated revenue of at least EUR 750 million) and the domestic minimum top-up tax under Pillar Two are deferred to 2025 (for prior coverage, see the tax alert dated 3 March 2022). In a letter released on 15 August 2022, the Secretary for Financial Services and the Treasury announced that the planned implementation in 2023 would be deferred to 2024 at the earliest.
A patent box regime will be introduced to encourage research and development (R&D) activities, which will provide tax concessions for Hong Kong-sourced profits from qualifying patents.
A mechanism will be introduced to facilitate companies domiciled overseas, particularly enterprises with a business focus in the Asia Pacific region, to re-domicile to Hong Kong, so that these companies may utilise Hong Kong’s favourable business environment and professional services. A consultation will be held and legislative proposals will be formulated in 2023/24.

With the implementation of the Pillar Two minimum tax, the various tax concessions offered or plan to be offered by Hong Kong may become less relevant for multinational groups, although the concessions should remain important for companies that are short of being categorised as large groups. While further details are to be released about the patent box, any new tax incentive schemes introduced in the post-BEPS world should generally require economic substance in Hong Kong, which likely would be tied to R&D activities carried out or arranged to be carried out in Hong Kong.

Agnes Cheung
BDO in Hong Kong