In this course · 3 of 4
Course 8
Trade across borders
4 lessons · 4 min
The short answer
Usually no. A Hong Kong entity need not prepare a master file and local file if it meets any two of three tests: revenue of HK$400 million or less, total assets of HK$300 million or less, or 100 employees or fewer. The arm's-length principle (pricing related-party deals as strangers would) still applies.
Hong Kong's transfer pricing documentation rules (Part 9A of the Ordinance, explained in the Inland Revenue Department's (IRD's) practice note on documentation) apply to entities in a group.
Exemption by size. An entity need not prepare both master file and local file if it meets any two of:
- Revenue for the accounting period not above HK$400 million.
- Total assets at year-end not above HK$300 million.
- Average employees not above 100.
Exemption by transaction type (no local file for a type of related-party transaction if it does not exceed):
| Type | Threshold |
|---|---|
| Transfers of property (other than financial assets and intangibles) | HK$220 million |
| Financial assets | HK$110 million |
| Transfers of intangibles | HK$110 million |
| Other transactions | HK$44 million |
If no type of controlled transaction needs a local file, the master file is not required either.
What the exemptions do not cover
- Transfer pricing must still follow the arm's-length principle, and the IRD can adjust profits and impose penalties for a failure to follow the rules.
- You should keep records to support intragroup pricing, because the IRD's information powers remain.
Check your group's structure with an adviser; the group-level master file and country-by-country reporting rules apply to larger groups.
Legal basis and sources
The law
- Inland Revenue Ordinance (Cap. 112), Part 9A, s.58C
- Inland Revenue Ordinance (Cap. 112), s.50AAF
General information for business owners, not legal, tax or professional advice. Rules change, so check the sources or ask a licensed professional before you act.
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