A Guide to Global Minimum Tax for MNEs

Hong Kong has implemented the OECD’s Pillar Two global minimum tax regime under the BEPS 2.0 framework, with the rules applying to fiscal years beginning on or after January 1, 2025. The regime introduces a 15 percent global minimum effective tax rate for multinational enterprise (MNE) groups with consolidated annual revenue of at least €750 million, significantly reshaping the international tax landscape for large groups operating in or through Hong Kong.

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Under the amended Inland Revenue Ordinance, in-scope MNEs must assess their global revenue, determine jurisdictional effective tax rates, and calculate any top-up tax exposure under the Income Inclusion Rule (IIR), Undertaxed Profits Rule (UTPR), and Hong Kong’s own minimum top-up tax (HKMTT), which takes priority as a qualified domestic minimum top-up tax. These rules represent a fundamental shift from entity-level taxation to a jurisdictional effective tax rate test, requiring enhanced data collection, cross-border coordination, and group-wide tax governance. 

With the rules now in force and the first compliance deadlines approaching in 2026, affected MNEs should be evaluating their structure, tax positions, and reporting systems to ensure readiness under Hong Kong’s new global minimum tax framework.

Hong Kong’s implementation of the Pillar Two global minimum tax 

Hong Kong has implemented the global minimum tax in accordance with the BEPS 2.0 framework and a related HKMTT since 2025, with the enactment of an amendment to the Inland Revenue Ordinance (IRO) on 6 June 2025.   

Under the IRO Amendment, in accordance with Pillar Two of BEPS 2.0, a global minimum tax of 15 percent is imposed on MNE groups with annual consolidated revenue of EUR 750 million or above in at least two of the four fiscal years immediately preceding the current fiscal year.  

The global minimum tax rules do not apply to companies within Hong Kong that have no foreign presence, government entities, international and non-profit organizations, or entities that meet the definition of a pension, investment, or real estate fund. 

Implementation rules 

Under the GloBE rules, the global minimum tax is implemented through the following mechanisms: 

• The Income Inclusion Rule (IIR) – requires the “ultimate parent company” of an in-scope MNE to pay top-up taxes on behalf of a constituent entity located outside of the jurisdiction where the parent itself is located whose ETR falls below 15 percent.
• The Undertaxed Profits Rule (UTPR) – a backstop to the IIR that requires a member of an in-scope MNE to make an adjustment “in respect of any top-up tax that is allocated to that taxpayer from a low-tax Constituent Entity of the same group”.

Meanwhile, since January 1, 2025, Hong Kong has implemented the Hong Kong Minimum Top-Up Tax (HKMTT), the local implementation of the Pillar Two global minimum tax formulated following the GloBE Rules with Hong Kong-specific adjustments. It has been designed to meet the requirements of a qualified domestic minimum top-up tax (QDMTT) so that top-up taxes paid under this system are creditable against top-up taxes imposed under the GloBE rules. The HKMTT takes priority over the IIR and UTPR, and is not applicable to investment and insurance investment entities.

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The IRO Amendment stipulates that a Hong Kong constituent entity of an in-scope MNE is chargeable to HKMTT for a fiscal year in the amount that would be determined as the top-up tax under the GloBE rules. Top-up tax imposed in Hong Kong under the GloBE rules and HKMTT is deemed as profits tax.

The HKMTT calculates the effective tax rate (ETR) for Hong Kong constituent entities in MNEs, aggregating income and tax of all local entities to calculate a jurisdictional ETR, and applies a top-up tax if the ETR falls below 15 percent.

According to the Inland Revenue Department, the HKMTT is allocated among and charged on the Hong Kong constituent entities of an in-scope MNE group in proportion to each entity’s GloBE income, unless the group designates one or more Hong Kong constituent entities to pay the HKMTT.

In-scope MNEs are liable to pay HKMTT beginning in the fiscal year starting on or after January 1, 2025. 

Jurisdiction of top-up tax

Under the GloBE rules, if a jurisdiction has implemented its own QDMTT, it has first priority to collect the top-up tax due by low-tax constituent entities of in-scope MNEs that operate within its jurisdiction whose ETR is below 15 percent. Otherwise, another jurisdiction can collect the top-up tax by implementing the IIR or UTPR.  

Hong Kong has received transitional qualified status for its IIR, the HKMTT, and the QDMTT Safe Harbour under the IRO Amendment from January 1, 2025. This means these rules are in effect for the fiscal year starting on or after January 1, 2025, ensuring tax revenue remains local and preventing double taxation, aligning with Hong Kong’s position as a global business hub. 

Safe harbor provisions 

Under the GloBE rules, in-scope MNE groups can benefit from the QDMTT Safe Harbor, under which it has been deemed that local top-up taxes are creditable against the GloBE top-up tax thereby rendering the top-up tax payable by a group in Hong Kong as zero. This reduces the tax compliance burden on the group as it does not need to determine GloBE ETR and other computations for Hong Kong.    

Additionally, the IRO Amendment outlines a range of transitional safe harbors that ease the compliance burden on in-scope MNEs during the transition period. The transition period covers all fiscal years beginning on or before December 31, 2026, not including fiscal years ending after June 30, 2028. 

These transitional safe harbors are: 

• The transitional Country-by-Country Reporting Safe Harbour: Under certain circumstances, the top-up taxes payable by the MNE group’s ultimate parent company for constituent entities in Hong Kong can be deemed to be zero for a fiscal year within the transition period.
• The transitional UTPR Safe Harbour: Under certain circumstances, the UTPR top-up tax amount for the ultimate parent company can be zero for a fiscal year within the transition period (such as if the corporate tax rate in the ultimate parent company’s jurisdiction is 20 percent or more).
• The QDMTT Safe Harbour: Under certain circumstances, an in-scope MNE’s jurisdictional top-up tax for constituent entities in a jurisdiction can be zero for a fiscal year within the transition period.
• The Simplified Calculations Safe Harbour for non-material constituent entities: The in-scope MNE’s top-up tax for a jurisdiction for a fiscal year within the transition period can be deemed to be zero if the MNE’s GloBE revenue, income, ETR, and profit for the jurisdiction for the fiscal year fall below a certain threshold. 

Determining applicability of Pillar Two 

MNEs with operations in Hong Kong must assess both their global revenue to determine , and the  

Part 4AA entities 

Under the IRO Amendment, a “Part 4AA entity” is a Hong Kong constituent entity that is part of an in-scope MNE. 

The entity can be any of the following: 

• A Hong Kong constituent entity of an in-scope MNE;
• A Hong Kong standalone joint venture of an in-scope MNE;
• A Hong Kong member of a joint venture group of an in-scope MNE; or
• A Part 4AA stateless constituent entity of an in-scope MNE. 

The Inland Revenue Department (IRD) provides a further breakdown of how these entities are defined: 

Determining the revenue threshold 

The IRO Amendment retains the GloBE rules’ consolidated revenue threshold in Euros, meaning Hong Kong-based entities that prepare their consolidated financial statements in Hong Kong dollars or another currency must convert their consolidated revenue based on the average foreign exchange rate for December of the calendar year preceding the commencement of the relevant fiscal year based on the forex reference rates of the European Central Bank (ECB), or, if the ECB does not quote the relevant forex rate, based on the average forex rate for the month of December published by the Hong Kong Monetary Authority (HKMA). 

Determining income and ETR of constituent entities 

For the purpose of IIR and UPTR, in-scope MNEs are required to identify the constituent entities of the group for each jurisdiction in which it operates (operating jurisdiction).  

Moreover, for each operating jurisdiction and for each constituent entity operating in that jurisdiction, it must determine the following for the purpose of the GloBE rules: 

• Income and losses
• Tax attributable to income 

It must also determine the aggregate income or losses and aggregate attributable tax for all of the constituent entities within the operating jurisdiction. 

Finally, based on the above, the MNE must determine the ETR for the operating jurisdiction by dividing the aggregate attributable tax of the aggregate income by the aggregate income (or losses). The formula is as follows: 

GloBE ETR = (aggregate attributable tax ÷ aggregate income or loss) × 100 

Determining jurisdiction for top-up taxes 

In addition to assessing whether an MNE falls within the scope of the Pillar Two rules, they must also determine whether it is within the jurisdiction of Hong Kong for the purpose of collecting top-up tax. 

To assess whether an entity falls under Hong Kong jurisdiction for the purposes of the GloBE rules and HKMTT, the IRO Amendment has introduced a definition of “Hong Kong resident entity”, effective retrospectively from January 1, 2024. The definition is: 

• For a company, if it is incorporated in Hong Kong or, if incorporated outside Hong Kong, is normally managed or controlled in Hong Kong; or
• For other entities, if it is constituted under the laws of Hong Kong or, if otherwise constituted, normally managed or controlled in Hong Kong. 

The above definition aligns with the wording generally used in Hong Kong’s network of double taxation avoidance agreements. 

By implementing this definition retrospectively, entities that fall within the definition can be regarded as having been located in Hong Kong for the fiscal year starting in 2024, “thereby minimising its exposure to top-up tax in other jurisdictions which have implemented the GloBE rules for an accounting period beginning on or after 1 January 2024”. 

Preparing for compliance with GloBE rules in Hong Kong 

Large MNEs that are either resident in Hong Kong or have operations in the jurisdiction should first and foremost assess whether they fall within the scope of the GloBE rules and are therefore liable to pay top-up taxes.

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The next step will be to assess the exposure to the GloBE rules in the jurisdiction of Hong Kong, and whether their operations qualify as constituent entities, and finally whether the aggregate ETR of Hong Kong operations falls below the 15 percent tax threshold and are therefore liable to pay top-up taxes. 

Once it has been established that constituent entities in Hong Kong are liable for top-up taxes, groups should quantify their potential HKMTT exposure and determine how the liability will be allocated among local entities, or whether a designated entity will be appointed to settle the tax. 

MNEs and affected constituent entities should also review internal reporting systems, ensure that the necessary GloBE data can be accurately calculated, and evaluate whether any transitional or safe harbor provisions may apply. With the rules already in force, MNEs should conduct internal calculations as soon as possible to identify data gaps and reduce compliance risks ahead of upcoming filing deadlines. 

In the upcoming Part II of our series on Hong Kong’s global minimum tax, we explain the specific top-up tax return and notification filing requirements under Hong Kong’s implementation of the Pillar Two global minimum tax.