Table of Contents

Transfer pricing in Hong Kong is one of the most important legal factors to consider when conducting your business within the jurisdiction. This critical aspect extends beyond local considerations and holds substantial relevance in the global landscape.

Given its complex nature, our blog today is dedicated to addressing the top 10 questions surrounding transfer pricing, offering clarity on essential details of this framework.

What is Hong Kong Transfer Pricing?

Transfer pricing in Hong Kong is the costs charged between a Hong Kong company and its related entities in transferring goods, services, and intangible property.

Hong Kong Transfer Pricing (TP) legislation is a striking contribution to the anti-tax- avoidance of cross-border transactions, especially for those who are part of a multinational company group.

One must-know term in Transfer Pricing legislation is the arm’s length principle. This term is mentioned in the Associated Enterprises Article/ Article 9 under the Organization for Economic Co-operation and Development (OECD) Model. This standard rule is enlightened in most current Double Tax Agreements (DTA) of Hong Kong.

On 13 July 2018, the Inland Revenue (Amendment) No. 6 Ordinance 2018 (“Amendment Ordinance”) announced Hong Kong’s new transfer pricing model. Accordingly, the Inland Revenue Department (IRD) would have the right of adjustment to profits or charges derived from non-arm’s-length transactions between related entities which can be made for tax purposes in Hong Kong.

Related or associated entities of an enterprise here to mention often encompass the parent and subsidiary companies and companies under common control.

On 19 July 2019, the IRD released a series of Departmental Interpretation and Practice Notes (DIPNs) as the followings:

  • DIPN 58: Transfer pricing documentation and Country-By-Country reports
  • DIPN 59: Application of transfer pricing between associated entities
  • DIPN 60: Profit allocation to permanent establishments in Hong Kong

It should be noted that the Hong Kong transfer pricing basis follows quite the same as the OECD TP Guidelines for Multinational Enterprises and Tax Administrations which came into force in July 2017. The TP rule applies to the year of assessment which starts on or after 1 April 2018.

The arm’s length principle obliges any income or loss arising from one or more transactions about associated persons of a Hong Kong enterprise to be calculated on an arm’s length basis. Simply put, the price and expenses in a controlled transaction charged by your Hong Kong company’s related entities should be the same as the amount that would have been paid by independent companies.

Arm’s length term refers to the transaction in which there are two independent parties, and each of them is acting in its interest and benefit. A key to mention is that, if transfer pricing does not comply with this principle, the associated entities of that enterprise would be subject to stricter tax liabilities under the corresponding law.

Which Hong Kong entities are subject to the purview of TP legislation?

Under the transfer pricing regime, it is required for Hong Kong taxpayers of a group that exceeds the prescribed thresholds to prepare the transfer pricing documentation when engaged in transactions with its associated entities. The transfer pricing documentation covers three main papers: the master file and the local file, plus the Country-by-Country report.

Entities subject to master and local file preparation

Note that the threshold conditions will be determined based on two tests:

  • Business size test; and
  • Related-party transactions amount test

Business size test

If TWO of the following conditions are met, then the company is determined to satisfy the first test:

  • The company’s annual revenue exceeds HK$400 million in total;
  • The company’s asset value is more than HK$300 million in total;
  • The company’s average number of employees is not less than 100 persons

Amount of related-party transactions test

Combined with the first test, Hong Kong entities having types of income surpassing the corresponding threshold are required to comply with the obligation of TP documentation:

  • The annual amount of property transactions excluding financial assets and intangibles exceeds HK$220 million;
  • The annual amount of transactions concerning financial assets such as accounts receivables, equity or debt investments, etc., reach over HK$110 million;
  • The annual amount of transfers concerning intangible assets exceeds HK$110 million;
  • The annual amount of other transactions is not less than HK$44 million.

A Hong Kong entity, if staying below such thresholds, will be exempted from preparing the master and local files. Still, the IRD advised that excluded companies should prepare readily needed documents that would serve as solid proof for the fact their company’s TP arrangements are well complying with the arm’s length basis.



Be advised that a Hong Kong entity, if fully exempted from the local filing obligation based on the amount of controlled transaction test, is not obliged to prepare the master file.

Domestic related-party transactions can be excluded from the TP obligation if they meet certain conditions. Please read more in Question 5 for details on the conditions.

Other than a corporation, a partnership, and a trust, a Hong Kong permanent establishment including a joint venture, a representative, or a branch office can also be subject to the obligation for the master and local file. Dealings between the head office and a foreign branch, or between an overseas branch and an associated entity of the enterprise are typical examples.

Entities subject to Country-by-Country report

Country-by-country (CbC) Reporting is set out under Action 13 of the Base Erosion and Profit Shifting (BEPS) Package of the OECD. It is a minimum standard in which a multinational enterprise (MNE) group must file a CbC report for the preceding accounting period when it falls into certain conditions regarding revenue threshold and its constituent entities’ place of operation.

A similar approach is implemented in Hong Kong. The CbC reporting in Hong Kong is only applicable to a multinational enterprise (MNE) group which is a reportable group with its consolidated group revenue yearly meeting the prescribed threshold amount.

For example, the threshold volume for a Reportable Group in Hong Kong is set to be not less than HK$6.8 billion. This is Hong Kong’s ultimate parent entity (UPE) resident of this group who must file the CbC report to the competent authority in Hong Kong, but not other Hong Kong entities owned by this MNE group.

In another scenario, if the UPE in question is a non-Hong Kong resident, then its Hong Kong constituent entities shall be subject to filing the CbC Notification to the IRD when certain conditions prescribed in Division 3 (4) of the Amendment Ordinance are met.

To specify, non-arm’s length transactions, aka arm-in-arm transactions, indicate business arrangements in which buyers and sellers knew each other or have businesses or personal relationships. Transactions between family members or related shareholders in one company are typical instances of a non-arm’s length deal.

In most cases, there tends to be a lack of fair determination of pricing in a non-arm’s length transaction. Meanwhile, in a deal with a stranger, he will work for his interest, then such practices are not likely to happen.

In pursuance of the TP Ordinance, a Hong Kong taxpayer about its tax liability from the year of assessment on or after 1 April 2018, shall be determined on arm’s-length transactions between that taxpayer and its related parties. In this regard, tax adjustments are required for non-arm length arrangements.

What factors to consider

As stipulated in Article 69 of the DIPN 59, the determination of the arm’s length price between related parties depends on the comparison test between provisions in a controlled transaction and those in an independent arrangement. To obtain the most proper assessment, certain factors should be put into consideration, the keys of which include:

  • The commercial or financial relations between the related entities
  • Specific contractual terms tied to the relevant transactions
  • Associated economic circumstances of relevant transactions

How to determine the arm’s length price

Hong Kong entities are advised to apply transfer pricing methods and pick the most appropriate one to identify the arm’s length price. 5 transfer pricing methods can be utilized to satisfy the arm’s length provision:

  • Comparable uncontrolled price method
  • Resale price method
  • Cost-plus method
  • Profit split method
  • Transactional net margin method

Other than the above common ways, other TP methods are still acceptable providing that those given to establish price will not run beyond the arm’s length principle. One thing to keep in mind is that your selection of that other method should be supported by documentation on why it is a better solution.

Does the TP rule apply to domestic transactions?

Domestic transactions are excluded from the scope of the transfer pricing requirement, so no adjustments are made by the IRD on related persons in these transactions. Domestic transactions can qualify for the TP requirement exemption if the following conditions are met:

  • Domestic – i.e., the actual provision of the transaction is made in respect of the related persons’ trade, profession, or business carried out in Hong Kong.
  • No actual tax difference/ non-business loan – i.e., the income generated from the relevant activity of the related person is taxed in Hong Kong, or the transaction in question does not relate to interest-free loans in the ordinary course of money lending or intra-group financing business.
  • No actual provision for tax avoidance purposes – i.e., the key purpose of the provision is NOT to use the loss of any related person to reduce Hong Kong tax liability.

Free ebook

Everything you need to start business in Hong Kong

Find out in a matter of minutes.

 Everything you need to start business in Hong Kong

What must Hong Kong entities do to stay compliant with annual TP documentation and filing requirements?

For CbC filing requirement

The Hong Kong ultimate parent entity (UPE) about the MNE group (a reportable group) must file a CbC report for every accounting period starting on or after 1 January 2018, as prescribed in Section 58E of Inland Revenue (Amendment) (No. 6) Ordinance 2018. The deadline for CbC filing obligation is within 12 months after the end of the accounting period.

Based on OECD’s guide to CbC reporting, certain documents below should be prepared for filing a CbC report:

  • Information on the group’s economic activity: related/ unrelated party revenues, number of employees, tangible property except for cash, regulatory financial statements, internal management accounts, etc.
  • Information of the group’s constituent entities: the jurisdiction of tax residency/ incorporation of each entity, and description of each entity’s business activity.
  • Supporting proofs may be required to clarify the information in the CbC report.

Consistent with the Country-by-Country Reporting XML Schema implemented by the OECD, Hong Kong also requires a CbC report to be made in the format of Extensible Markup Language, or XML for short, according to DIPN 58. The content of the CbC report for each in-scope group should cover each tax jurisdiction it is carrying out business with the following information:

  • Total revenue
  • Profit before income tax
  • Paid and accumulated income tax
  • Total number of employees
  • Total capital and retained earnings
  • Tangible assets
How about other entities other than the above-stated Hong Kong UPE of a reportable group?

How about other entities other than the above-stated Hong Kong UPE of a reportable group?

In line with section 58H, unless falling into the exemption cases, Hong Kong constituent entities must file CbC notification to the Commissioner 3 months before the end of their corresponding accounting period.

For Master File and Local File

In-scope entities must submit master files and local files for accounting periods on or after 1 April 2018. Section 58C stipulated the time limit for preparing master and local files is 9 months from the end of that Hong Kong company’s accounting period.

A master file would help the Assessor obtain a high-level picture of the company group in terms of both the operation of its business and how transfer pricing is implemented within its structure. Meanwhile, a local file’s function is to describe the enterprise’s in-depth information on transactional transfer pricing in its particular jurisdiction. Both are essential documentation that contributes to ensuring that the company is being well compliant on an arm’s length basis in its transfer pricing situation.

What are the needed documents when preparing master and local files?

Master file

  • Information on the organizational structure;
  • A written description of the group’s business;
  • Group’s intangibles;
  • Group’s financial statements and related pricing agreements;
  • Documents on the financial activities of each constituent entity of the group; and
  • Other additional documents (if requested).

Local file

  • Local entity description;
  • Proofs of controlled transactions; and
  • The entity’s financial documents.

For a detailed description of what should be included in the above categories of information, please move to Question 8.

As per the case for transactions between the permanent establishment and other parts of one company, the Commissioner tends to consider the appropriateness of the documentation under the following aspects:

  • Consistency between the documentation and the economic substance of the company’s activities;
  • Similarity between dealing agreements of the permanent establishment and those adopted by independent companies;
  • Compliance of the permanent establishment’s dealing papers with the provisions in Rule 2, section 50AAK.

Who is exempt from complying with the TP documentation obligation?

The good news is that certain entities can reduce the burden of Hong Kong Transfer Pricing documentation compliance. Exemptions are given for those Hong Kong entities based on tests of the size of the business and amounts of controlled transactions.

Particularly, if your Hong Kong company does NOT exceed the thresholds, as we mentioned in Question 2, you are in no need to prepare the master and local files.

Below is one example for your better understanding of whether your entity is exempted from this TP requirement:



Michael began business with his Hong Kong corporation on 1 April 2019. The company’s financial statement was measured for the period between 1 April and 31 December 2019. The results to 31 December 2019 showed that the company reached its total revenue of $360 million and the value of the total assets of $270 million for the period concerned.

Regarding the size of the business test, as 2 out of 3 criteria were below the thresholds of $400 million and $300 million, in turn, Michael’s company would not be obliged to comply with the master and local filing requirements.

What information must be included in the master and local files?

Prescribed information under the Hong Kong TP regime, as specified in Part 3, Schedule 17I, for the master file and local file would include:

For Master File

You need to make sure your company covers sufficient information regarding the below 5 categories of documents:

Organizational structure information:

  • the group’s legal and ownership structure;
  • the geographical location of constituent entities whose group is a multinational enterprise group

Group’s business description on:

  • important drivers of business profits;
  • the supply chain for the group’s 5 biggest products/ services about its turnover and for which products/ services performed over 5% of its turnover;
  • list of key service arrangements between constituent entities of the group, excluding Research & Development services;
  • brief of the key geographic markets for the group’s mentioned products and services;
  • functional analysis of each constituent entity on the correlation between the contribution and value within the group;
  • brief of related transactions, acquisitions, or divestitures within the period concerned;

Group’s intangibles:

  • brief of how intangibles would be used for the group’s growth, ownership, and exploitation;
  • list of the group’s intangibles for transfer pricing purposes and the legal owners of the mentioned intangibles;
  • list of agreements with mentioned intangibles;
  • brief of the group’s transfer pricing policies in respect of the research and development and intangibles;
  • brief of transfers of interests in or control of intangibles among the group’s constituent entities within the concerned accounting period.

Financial activities between constituent entities

  • list of financing arrangements with unrelated lenders of the group;
  • list of the group’s financing entity (if any);
  • brief of the group’s general transfer pricing policies in connection with financing arrangements among the group’s constituent entities.

Group’s financial and tax positions

  • consolidated financial statements for the concerned accounting period; and
  • list of the group’s ongoing unilateral advance pricing arrangements and other tax rules concerning how income among territories is allocated.

For Local File

Needed documents for a local file under Hong Kong TP legislation are less than what must be retained for a master file:

Description of the local entity on:

  • management structure or organizational chart of the local entity;
  • information of senior individuals who receive the management reports of the local entity, and the location of the individuals’ principal offices;
  • brief of business strategy in which the local entity got involved;
  • list of important competitors;

Information on controlled transactions

  • brief of the material controlled transactions and their context;
  • amount of charges and receipts between the local entity and its related parties for each category of the controlled transaction;
  • list of the local entity’s related partners in each category of controlled transactions;
  • copies of all material agreements between the local entity and its related parties;
  • comparability and functional analysis of the local entity and its associated entities for each category of controlled transactions;
  • description of the most suitable transfer pricing method and why you chose it;
  • brief of the tested party and why you chose it;
  • brief of assumptions and financial information regarding the transfer pricing methodology;
  • copy of ongoing unilateral, bilateral, and multilateral advance pricing agreements and other tax rules about the controlled transactions;
  • Additional documents as prescribed by the corresponding provisions.

Financial information

  • the audited financial statements of the local entity for the accounting period concerned. In case no audited financial statements are available, the entity can submit its current unaudited statements for the mentioned accounting period;
  • schedules of related financial data and its distribution about the financial statements; and
  • schedules of related financial data concerning the comparability analysis.

Does income derived outside of Hong Kong have to be incorporated in the local file?

Non-Hong Kong-sourced earnings are still subject to the transfer pricing legislation in this city.

As prescribed by DIPN 58, the local file of one Hong Kong entity regarding its corresponding accounting period must NOT exclude transactions generating profits or income from outside Hong Kong.

In this regard, if two related Hong Kong entities engage in one controlled transaction and one of which or both entities is regarded to earn income outside Hong Kong, then this type of income would be considered as NOT for Hong Kong tax purposes.

Consequently, this controlled transaction comes out of the scope of domestic transactions for exemptions and, hence must be in the local filing, according to section 58C of the Inland Revenue Ordinance.

What are the penalties for non-compliance with TP legislation?

As for the Country-by-Country report, the penalty for non-compliance actions can result in a fine at level 5 or level 6 with the court order, depending on each case. Any failure to comply with the CbC report on requirements for Hong Kong UPE and other constituent entities under sections 58E (1), 58F, and 58H of the IRO can also lead to a daily fine of HK$500.

If your entity commits offenses in connection to the transfer pricing documentation, including the master file and local file, the penalties under sections 80(2Q), (2R), and (2S) are applied. Particularly, it would be imposed a conviction to a fine of level 5 or level 6.

Quick Tip

Quick Tip

It is worth mentioning that in case the taxpayer’s reasonable efforts in respect of the arm’s length principle are proven, there would be no additional tax levied on that individual. The penalties for non-compliance can vary from case to case.

Other than TP obligation, there might be other annual administration tasks that your proposed Hong Kong company needs to comply with.

For any further inquiries, please don’t hesitate to contact our dedicated team via We look forward to offering timely assistance to your business.

Disclaimer: While BBCIncorp strives to make the information on this website as timely and accurate as possible, the information itself is for reference purposes only. You should not substitute the information provided in this article for competent legal advice. Feel free to contact BBCIncorp’s customer services for advice on your specific cases.

Share this article

Industry News & Insights

Get helpful tips and info from our newsletter!

Stay in the know and be empowered with our strategic how-tos, resources, and guidelines.