Physical commodity trading in Hong Kong: the proposed 8.25% rate, its four conditions and its application from 2025/26

A bill before Hong Kong's Legislative Council would let physical commodity traders elect an 8.25% profits tax rate. It requires real substance: a commodity on a closed list, purchase and sale contracts effected in Hong Kong, HK$700 million of qualifying revenue, and management, staff and maritime service providers on the ground. If enacted, it would apply from the 2025/26 year of assessment, already closed: the irrevocable election needs preparing now.

Status as of 25 October 2026: the bill is under scrutiny by the Legislative Council (LegCo) and has not been enacted. No date has been set for the resumption of the Second Reading debate or for the Third Reading. The rules described are those of the text gazetted on 12 June 2026 and are subject to enactment.

Where the bill stands: settled content, open timetable

The regime is set out in the Inland Revenue (Amendment) (Tax Concessions for Shipping-related Activities and Physical Commodity Trading) Bill 2026, gazetted on 12 June 2026 [1][2].

The content of the regime appears settled. On 28 September 2026, in a written response to the Bills Committee, the government declined to add silver "at this stage" and rejected any safe harbour specific to CIF contracts [4]. Its draft amendments, considered on 16 October, only correct the Chinese text [6][7].

The timetable remains open. As at 21 October, the Bills Committee had not yet reported to the House Committee [8], and the bill is not on the Council's agenda for 28 October or 4 November [9]. Once gazetted, the Ordinance will come into force and apply, on a permanent basis, from the 2025/26 year of assessment (1 April 2025 to 31 March 2026), based on the financial year ending within that period [1][3][4]. Eligibility should therefore be prepared on the gazetted text.

Four cumulative conditions

The 8.25% rate, half the standard 16.5% rate, applies to profits from qualifying trading activities and to income incidental to them [1]. According to the government, this covers interest, foreign exchange and hedging gains linked to the trades, not pure derivatives activity [5].

1. A commodity listed in Schedule 17FE. The list is closed: 55 commodities that have exchange-traded financial products and move mainly by sea [1][2]. A mixed trader is not shut out: subject to the safe harbour (condition 3), it keeps the regime for its profits on listed commodities only [1][5].

The Commissioner of Inland Revenue, who heads the Inland Revenue Department (IRD), may amend the list by order published in the Gazette, subject to negative vetting by LegCo, without new primary legislation [1][3].

2. Both contracts effected in Hong Kong, and actual delivery. The purchase contract and the sale contract must both be effected in Hong Kong, in the ordinary course of a business carried on there, and lead to the actual transport and delivery of the goods [1][3], which need not pass through Hong Kong [4]. The regime looks for a centre of decision-making, not a place of signature: the trader will have to show who negotiates and accepts each contract, and from where. Wholesaling and retailing are excluded; the IRD will clarify the scope of that exclusion [5].

3. A HK$700 million threshold. Qualifying revenue must reach this amount for the basis period [1]. The trader must also pass through one of three gateways:

• carrying on only qualifying activities in Hong Kong;
• the safe harbour: at least 75% of profits from all sources (in Hong Kong or elsewhere) derived from qualifying activities and 75% of assets used in them, for the year or on average over two or three years, with intra-group shareholdings and dividends left out under the IRD's forthcoming guidance [5];
• exceptionally, a determination by the Commissioner, who must be of the opinion that the company would have met one of the first two gateways in the ordinary course of its business.

4. Management and substance in Hong Kong. Central management and control must be exercised in Hong Kong, and the activities carried out or arranged there, not through a permanent establishment abroad [1]. Substance has three limbs: qualified full-time employees and operating expenditure incurred in Hong Kong, each "adequate" in the Commissioner's opinion and at least three employees and HK$3 million for 8.25%, or one employee and HK$1 million for 15% [1]; and the maritime test, covered below. According to the government, reliance on staff of a related company will be assessed case by case, and substance applied flexibly in the year of entry and the year of exit [5].

Two anti-avoidance provisions apply: the arm's length principle between associated persons (section 14ZZJ), and exclusion from the regime where one of the main purposes of a transaction is to obtain a tax benefit (section 14ZZK) [1]. For the subsidiary of a Mainland China group, how the central management and control test interacts with Mainland tax residence rules should be examined with your advisers.

The maritime test in practice: CIF, FOB and drop-ship

Where the trader incurs expenditure on the eleven specified maritime services (ocean freight, marine cargo insurance, ship broking, arbitration, legal services and others), at least 30% must go to providers based and registered in Hong Kong. Where several types of service are used, the test is 30% of the total or 50% of a single type [1][2]. Otherwise, the reduced rate does not apply [1].

According to the government, expenditure is incurred by the party that solicits, contracts for and pays for the service [5]:

• CIF purchase: the supplier charters and insures; the trader incurs neither freight nor insurance.
• CIF sale on a drop-ship basis (the supplier ships at its own cost to the end buyer): the trader incurs none either.
• CIF sale shipped by the trader: the trader books freight and insurance, and the test applies.

FOB is not addressed. On the same reasoning, an FOB buyer that charters the vessel itself incurs this expenditure, a reading the IRD has yet to confirm. Even without freight or insurance, legal fees count if they concern the shipping-related aspects of the contract, and arbitration fees if the arbitration is held in Hong Kong under a written clause in the contract [1][5].

Incoterms remain a commercial choice. For a trader that charters, however, the choice of broker, insurer and seat of arbitration bears on eligibility and should be documented contract by contract. These clarifications will sit in the IRD's forthcoming guidance, not in the legislation [5].

8.25% or 15%: the election, its irrevocability and the 2025/26 year of assessment

The regime applies on a written election: 8.25%, or 15% with lower floors [1]. The government intends the 15% option for groups within the scope of Pillar Two, but the text does not restrict it to them [1][2]. A trader that falls short of three employees or HK$3 million of expenditure can therefore aim for 15% rather than 16.5%.

The election remains in force until the other rate is elected, and it is irrevocable: the company cannot leave the regime, only switch rate [1][5]. If the regime ceases to apply in a year after applying in the previous one, it is also excluded for the following year (section 14ZZH(9)). One failed year therefore costs at least two years at the reduced rate.

The financial year on which the 2025/26 year of assessment is based has now closed for every company. For returns lodged by a tax representative (otherwise, the date shown on the return applies), the IRD distinguishes three cases:

• year-ends from April to November 2025 ("N" code): financial year generally opened in 2024; return due on 4 May 2026, before the bill was even gazetted [10];
• December 2025 year-ends ("D" code): paper return due on 31 August 2026, electronic return on 2 October [11];
• year-ends from January to March 2026 ("M" code): paper return due on 30 November 2026, electronic return on 30 December [12].

Eligibility is therefore tested after the event. "N" and "D" returns should already have been lodged, and how the regime is to be claimed on them has not been settled. To change rate, the government points to the Inland Revenue Ordinance: correction of an error or omission (section 70A) or an objection to the assessment [5].

Groups within the scope of Pillar Two

A group with consolidated revenue of at least €750 million in at least two of the four preceding fiscal years is subject, for fiscal years beginning on or after 1 January 2025, to the Hong Kong minimum top-up tax (HKMTT) if its effective tax rate in Hong Kong is below 15% [2][14]. The HKMTT may then collect the gap between 8.25% and 15%; the 15% option is designed to avoid that mechanism and part of the GloBE computations (the OECD global minimum tax rules) [2].

The government is still assessing the "Side-by-Side" package published by the OECD in early 2026 and its safe harbour for substance-based tax incentives [5]. In its submission, KPMG considers most Hong Kong exemption or reduced-rate regimes ineligible, because they are not calculated on expenditure; the government has not taken a position [5]. No group can therefore rely on that safe harbour to keep 8.25%.

For a 31 December 2025 year-end, KPMG places the first top-up tax return on 31 March 2027, or on 30 June 2027 for a group that came into scope in 2025 [14][18].

In focus — Which route for which function

- Physical trading: the reduced rate described here, permanent, on a written election subject to IRD review, with no prior approval, subject to enactment [1][4].

- Group treasury: a two-tier overhaul of the existing corporate treasury centre (CTC) regime, with IRD pre-approval valid for five years at Tier 2; consultation closed on 4 September 2026, bill expected in the first half of 2027 [16].

- Regional headquarters (sourcing, supply chain, treasury), derivatives and commodities: a concessionary regime for strategic industries, at 5% or 8.25% for up to five years, on case-by-case approval by the Financial Secretary, and, for a company already established, only on incremental profits; bill in December 2026, applying from 2027/28 [15].

- Gold and the trading ecosystem: LegCo consultation planned for 2027 [17].

To check now: which entity carries which function, where decisions are actually taken, and with which teams and which expenditure.

What to do now

1. By 30 November 2026 — Reconcile 2025/26 transactions with Schedule 17FE, commodity by commodity, then test the other conditions, maritime test included; first for January–March 2026 year-ends, whose paper return is due on that date through a tax representative [12].
2. On receipt of the 2025/26 notice of assessment — Where a return was lodged without the regime, consider with your advisers an objection within the one-month period under section 64 of the Inland Revenue Ordinance [13], since no procedure has been set [5].
3. By 31 December 2026 — Gather contemporaneous evidence of where management was exercised during the period tested: board minutes, delegations of authority, the teams that negotiated and concluded the contracts, headcount. Substance that was absent cannot be rebuilt after the event; without such evidence, the irrevocable 2025/26 election calls for caution. For the 2026 financial year, keep these records as you go.
4. By 31 December 2026 — Map, flow by flow, the Incoterm, who orders and pays for freight, insurance and broking, the seat of arbitration and the share placed with Hong Kong-based providers. Incoterms remain a commercial choice: section 14ZZK excludes the regime where one of the main purposes of a transaction is to obtain a tax benefit [1].
5. Before electing, and by 31 March 2027 at the latest — Groups with consolidated revenue of €750 million or more: compare the cost of 8.25% plus HKMTT with the 15% option, compliance costs included [14][18].
6. On gazettal of the Ordinance, then on publication of the IRD guidance — Settle with your advisers the written election and the procedure for 2025/26.

Bolster Group has worked with international companies, including trading companies, since 2012. On this regime, our Hong Kong office (Bolster Group Limited) carries out the eligibility test, documents existing substance and prepares the analysis of the rate election and of hedging and foreign exchange income. Where the commercial case warrants it, it assists with setting up a trading entity with management and teams in Hong Kong. This work is carried out in coordination with your regulated advisers. Our partners meet clients in Hong Kong, Shanghai, Shenzhen, Geneva, Amsterdam and Kuala Lumpur.

This note is for general information only. It is not legal or tax advice; any decision should be assessed with your advisers.

Sources

1. Government of the Hong Kong SAR, Inland Revenue (Amendment) (Tax Concessions for Shipping-related Activities and Physical Commodity Trading) Bill 2026, gazetted on 12 June 2026, LC Paper No. CB(2)812/2026 (ss. 14ZZD to 14ZZL; Schedules 8D, 17FE, 17FF and 67). https://www.legco.gov.hk/yr2026/english/bills/b202606123.pdf
2. Transport and Logistics Bureau, Legislative Council Brief, ref. TLB 500-004-003, 10 June 2026. https://www.legco.gov.hk/yr2026/english/brief/tlb500004003_20260610-e.pdf
3. LegCo, Legal Service Division, Report on the Bill, LC Paper No. LS36/2026, 25 June 2026. https://www.legco.gov.hk/yr2026/english/hc/papers/hc20260626ls-36-e.pdf
4. Transport and Logistics Bureau, Administration's response to issues raised at the meeting on 10 July 2026, LC Paper No. CB(2)1215/2026(02), 28 September 2026. https://www.legco.gov.hk/yr2026/english/bc/bc51/papers/bc5120261016-cb2-1215-2-e.pdf
5. Transport and Logistics Bureau, Administration's consolidated response to the submissions received by the Bills Committee, LC Paper No. CB(2)1215/2026(03), 28 September 2026. https://www.legco.gov.hk/yr2026/english/bc/bc51/papers/bc5120261016-cb2-1215-3-e.pdf
6. Transport and Logistics Bureau, Inland Revenue Department and Department of Justice, Draft amendments to the Bill to be proposed by the Administration, LC Paper No. CB(2)1290/2026(01), October 2026. https://www.legco.gov.hk/yr2026/english/bc/bc51/papers/bc51-20261016-cb2-1290-1-e.pdf
7. LegCo, Bills Committee, agenda for the meeting of 16 October 2026 (issued 13 October 2026). https://www.legco.gov.hk/yr2026/english/bc/bc51/agenda/bc5120261016.htm
8. LegCo, Position Report on Bills Committees and subcommittees (as at 21 October 2026), LC Paper No. CB(2)1325/2026. https://www.legco.gov.hk/yr2026/english/hc/papers/hc20261023cb2-1325-e.pdf
9. LegCo, House Committee, agenda for the meeting of 23 October 2026 (issued 22 October 2026). https://www.legco.gov.hk/yr2026/english/hc/agenda/hc20261023.htm
10. Inland Revenue Department, Circular Letter to Tax Representatives — Block Extension Scheme for Lodgement of 2025/26 Tax Returns, March 2026. https://www.ird.gov.hk/eng/pdf/bel26e.pdf
11. Inland Revenue Department, Circular Letter to Tax Representatives — Block Extension Scheme for Lodgement of 2025/26 Tax Returns, Extended Due Date for "D" Code Returns, 14 July 2026. https://www.ird.gov.hk/eng/pdf/bel26ea.pdf
12. Inland Revenue Department, Circular Letter to Tax Representatives — Block Extension Scheme for Lodgement of 2025/26 Tax Returns, Extended Due Date for 'M' Code Returns, 20 October 2026. https://www.ird.gov.hk/eng/pdf/bel26eb.pdf
13. Inland Revenue Department, Departmental Interpretation and Practice Notes No. 6 (Revised) — Objections to the Commissioner, Appeals to the Board of Review, Appeals to the Courts, November 2016. https://www.ird.gov.hk/eng/pdf/dipn06.pdf
14. Inland Revenue Department, Global minimum tax and Hong Kong minimum top-up tax for multinational enterprise groups, accessed 25 October 2026. https://www.ird.gov.hk/eng/tax/bus_beps.htm
15. Financial Services and the Treasury Bureau, Preferential Policy Package to Attract Strategic Industries and Investments – Concessionary Tax Regime, LC Paper No. CB(1)1126/2026(04), September 2026 (Panel on Financial Affairs, meeting of 5 October 2026). https://www.legco.gov.hk/yr2026/english/panels/fa/papers/fa20261005cb1-1126-4-e.pdf
16. news.gov.hk (Government of the Hong Kong SAR), Views sought on corporate tax perks, consultation on the corporate treasury centre regime, 27 July 2026. https://www.news.gov.hk/eng/2026/07/20260727/20260727_170351_836.html
17. Government of the Hong Kong SAR, The Chief Executive's 2026 Policy Address, 16 September 2026 (paragraphs 46 and 47, Indicator 12). https://www.policyaddress.gov.hk/2026/public/pdf/policy/policy-full_en.pdf
18. KPMG China, BEPS Pillar Two Implementation in Hong Kong SAR – Navigating Key Compliance Dates in 2026 and Beyond, 15 April 2026. https://kpmg.com/cn/en/insights/2026/04/beps-pillar-two-implementation-in-hk-navigating-key-compliance-dates-in-2026-and-beyond.html