Transfer Pricing compliance overview of Hong Kong

Executive Summary

General Requirements

  • The Inland Revenue (Amendment) (No. 6) Ordinance 2018 codifies transfer pricing principles into the Inland Revenue Ordinance and applies to transactions between associated persons.
  • The Hong Kong transfer pricing framework is largely based on the OECD Guidelines, which serve as the interpretative standard for applying the arm’s length principle.
  • Compliance obligations extend to all intercompany transactions, including domestic ones, though domestic transactions meeting specific conditions such as no tax advantage may be exempted from adjustments.
  • The regulations became effective across staggered dates starting 1 January 2018 for Country-by-Country reporting and 1 April 2018 for Master and Local Files.

Documentation Requirements

  • Hong Kong mandates a three-tiered documentation structure comprising a Master File, a Local File, and a Country-by-Country Report based on BEPS Action 13.
  • Master and Local Files must be prepared within nine months after the end of the entity’s accounting period and submitted to the authorities upon request.
  • Taxpayers are required to confirm their transfer pricing documentation compliance and disclose locations of non-resident associated persons in the annual profits tax return.
  • Selected taxpayers may be requested to complete and electronically submit specific documentation forms within one month of receiving a formal request from the Inland Revenue Department.

Results of Non-Compliance

  • Failure to comply with Master File or Local File requirements without a reasonable excuse can result in a fine at level 5 (HKD 50,000) and a court order to comply.
  • Non-compliance with a court order to produce documentation can lead to an escalated level 6 fine of HKD 100,000.
  • Willful filing of misleading, false, or inaccurate Country-by-Country reporting information can result in fines up to HKD 50,000 and imprisonment for up to three years.
  • Shortfall penalties for undercharged tax resulting from adjustments are determined based on the level of effort spent to determine the arm’s length price.

Country Specific Information

  • Enterprises are exempted from preparing Master and Local Files if they meet size-based criteria, satisfying any two of: revenue < HKD 400M, assets ,< HKD 300M, or employees < 100.
  • Specific transaction thresholds for Local File exemption apply if values fall below limits like HKD 110M for intangibles or HKD 44M for service and royalty income.
  • The jurisdiction does not apply thin capitalization rules but maintains high scrutiny on claims of non-Hong Kong sourced revenue and transactions with tax-haven locations.
  • Advance Pricing Agreements are available for unilateral, bilateral, and multilateral arrangements and typically have a tenure of three to five years.

Compliance Table

DocumentDeadlineLanguageThresholds, Scope & Penalties
Local File9 months after the end of the Hong Kong entity’s accounting period.English or Chinese.Threshold: Fails 2 of 3 size criteria (Rev 400M, Assets 300M, FTE 100) or exceeds category limits. Scope: Cross-border and non-exempt domestic. Penalty: HKD 50k fine.
Master File9 months after the end of the Hong Kong entity’s accounting period.English or Chinese.Threshold: Prepared if any Local File category threshold is exceeded. Scope: Global overview and TP policies. Penalty: Level 5 fine (HKD 50k) and potential court order.
CbC NotificationWithin 3 months after the end of the ultimate parent entity’s accounting period.English or Chinese.Threshold: Consolidated group revenue HKD 6.8B (EUR 750M). Scope: All local constituent entities. Penalty: HKD 50k fine plus HKD 500 per day of delay.
CbC ReportWithin 12 months after the end of the ultimate parent entity’s accounting period.English or Chinese.Threshold: Consolidated group revenue HKD 6.8B (EUR 750M). Scope: Required if UPE or surrogate is local resident. Penalty: HKD 50k-100k fine and prison for willful intent.
Other (Form S2)1 month from profits tax return issue date.English or Chinese.Threshold: Mandatory for all corporate taxpayers engaged in related-party transactions. Scope: Discloses RPT locations and compliance status. Penalty: General CIT penalties and increased audit risk.

Disclaimer: This information is obtained from secondary sources and is included for informative purposes. It should be confirmed by a local