Hong Kong: local rules

Hong Kong has no separate transfer pricing act. The rules are in Part 8AA of the Inland Revenue Ordinance (Cap. 112), added by the Inland Revenue (Amendment) (No. 6) Ordinance 2018 and in force since 13 July 2018 (transactions entered into before that date are grandfathered). Rule 1 (s.50AAF) says that if a transaction between two persons that meet the participation condition (s.50AAG: one participates directly or indirectly in the management, control or capital of the other, or the same persons participate in both) differs from what independent persons would agree and gives a Hong Kong tax advantage, income or loss is computed as if the arm's length terms applied. Rule 2 (s.50AAK) applies the separate enterprise principle to a permanent establishment, and s.50AAE requires Part 8AA to be read consistently with the OECD rules. Part 8AA also covers corresponding relief for adjustments (ss.50AAM to 50AAO) and advance pricing arrangements (ss.50AAP to 50AAR). The IRD explains the rules in DIPN 58 (documentation and CbC), DIPN 59 (associated persons) and DIPN 60 (permanent establishments), all July 2019. Domestic transactions are covered unless they give no tax advantage.

A Hong Kong entity of a group that has controlled transactions must prepare a master file and a local file within 9 months after the end of its own accounting period (s.58C). The master file follows the OECD five categories. The local file must cover each type of controlled transaction above HKD 220m (property), HKD 110m (financial assets or intangibles) or HKD 44m (other). An entity that meets any two of revenue of HKD 400m or less, assets of HKD 300m or less, and 100 employees or fewer is exempt from both files. The files are not filed with the return. The return and form S2 say whether they are required, and the IRD runs desk-based reviews, usually within 6 months after the return is filed. Keep the files at least 7 years, in English or Chinese. Documents that show reasonable efforts protect against the additional tax.

DIPN 59 follows the OECD Guidelines and lists the comparable uncontrolled price, resale price, cost plus, transactional net margin and profit split methods. The most appropriate method for the case is used. If a traditional transaction method and a profit method are equally reliable, the traditional one is preferred (para 103). Other methods are allowed if the file explains why the OECD methods do not work (para 106). Results are shown as a range, and an interquartile range can be used. If the price is outside the range, the adjustment point is usually the median, applied year by year (paras 120 to 122, 126).

For a transfer pricing adjustment under s.50AAF(5), additional tax under s.82A(1C) to (1F) can be up to the tax undercharged, which is lower than the up to three times that applies to other incorrect returns. No additional tax applies if the person proves it made reasonable efforts to find the arm's length amount (s.82A(1G); DIPN 59 paras 127 to 132). Failing to prepare the master and local file is an offence under s.80(2Q): a fine at level 5 (HKD 50,000), a court order to comply, and a level 6 fine (HKD 100,000) for ignoring the order. CbC offences (s.80G) carry a level 5 fine and HKD 500 a day for a continuing failure. Pillar Two offences (s.80O) carry a level 3 fine plus a fine of three times the top-up tax undercharged.

Hong Kong added Part 4AA and Schedules 61 to 64 to the Inland Revenue Ordinance by the 2025 Minimum Tax Ordinance (enacted 6 June 2025). The income inclusion rule (IIR) and the Hong Kong minimum top-up tax (HKMTT, a qualified domestic minimum tax) apply to fiscal years beginning on or after 1 January 2025 for groups with revenue of at least EUR 750m in two of the four prior years. The UTPR starts on a date still to be set by notice in the Gazette. Each Hong Kong entity files a top-up tax notification within 6 months after the fiscal year end and one top-up tax return (BIR82, which carries the GIR information) within 15 months (18 months for the group's transition year), through the Pillar Two Portal. One designated local entity can file for all Hong Kong entities, and the GIR can be filed abroad if the other country exchanges it with Hong Kong. Top-up tax is deemed profits tax and is paid one month after the filing deadline or the assessment notice, whichever is later. Part 4AA entities must also e-file their profits tax return from 2025/26.

Groups with consolidated revenue of at least HKD 6.8bn (or the EUR 750m equivalent in the parent's currency for a foreign-parented group) file a CbC return through the CbC Reporting Portal within 12 months after the accounting period. The Hong Kong ultimate parent has the main duty, and every Hong Kong entity notifies the IRD within 3 months. Advance pricing arrangements (3 to 5 years, annual reporting) are available under DIPN 48, with an early engagement request at least 6 months before the start. Mutual agreement procedure requests go to the competent authority under the tax treaties (form IR1454, DIPN 45). The profits tax return is issued each April. The normal due date is one month after issue, and tax representatives get the Block Extension Scheme dates by accounting date code (N, D, M). Entities of in-scope Pillar Two groups must e-file and get one more month. Under Cap. 1 s.71(1), a deadline that falls on a Sunday, a general holiday, or a gale or black rainstorm warning day moves to the next day that is none of these. A Saturday is not covered, so only Sundays and general holidays are rolled here. Gale and black rainstorm days cannot be known in advance and are not shown.