Mr. Lam’s group runs a factory in Binh Duong, a trading company in Singapore and a holding company in Hong Kong. Ten years ago, this structure parked most profits in two near-zero-tax locations. In 2026, his CFO discovered the group’s total tax bill no longer adds up the old way — even though no country raised its headline rate.
How Pillar Two rewrote the rules
The OECD BEPS 2.0 framework imposes a 15% global minimum tax on multinational groups with consolidated revenue of EUR 750 million or more. Three mechanisms matter:
- QDMTT (Qualified Domestic Minimum Top-up Tax): the country where a subsidiary operates collects the top-up to 15% locally.
- IIR (Income Inclusion Rule): the ultimate parent’s country collects the shortfall if a subsidiary is taxed below 15% elsewhere.
- UTPR (Undertaxed Profits Rule): a backstop where the IIR does not fully apply.
The core logic: profits booked in low-tax locations without real activity get topped up somewhere until they reach 15%. Parking profits in shell companies is effectively over.
Where Vietnam, Singapore and Hong Kong stand
Vietnam: National Assembly Resolution 107/2023/QH15 took effect on 1 January 2024 and applies from fiscal year 2024, covering both QDMTT and IIR. Decree 236/2025/ND-CP provides detailed guidance, effective 15 October 2025. A Vietnamese subsidiary of a large group that enjoys incentives pushing its effective rate below 15% now pays top-up tax in Vietnam itself.
Singapore: applies the IIR and a domestic top-up tax for fiscal years beginning on or after 1 January 2025 under its 2024 multinational enterprise minimum tax legislation. Hong Kong: rolled out its IIR and Hong Kong minimum top-up tax for fiscal years beginning on or after 1 January 2025. Its Foreign-sourced Income Exemption (FSIE) regime, in force since 1 January 2023, requires adequate qualified employees and operating expenditure in Hong Kong for MNE entities claiming exemption.
Real substance is the only ticket left
Pillar Two contains one crucial carve-out: income tied to tangible assets and real payroll (the substance-based income exclusion) is removed from the top-up base. Put bluntly, a real factory, real staff and real spending in a country shield the corresponding profit. A holding company with only a seal and a virtual office address creates no carve-out at all.
Practical consequences for investors:
- Choose headquarters locations based on where decisions are really made and teams really sit — not headline tax rates.
- Singapore/Hong Kong entities must evidence that profit-generating activity happens there: where contracts are signed, who approves them, which staff perform the work.
- Transfer pricing documentation (under Decree 255/2026/ND-CP, effective 1 July 2026) must tell the same substance story.
What investors should do in 2026
Map the whole structure and flag every entity booking profit without matching people and spending. For those entities, either build real substance (hire, move decision-making there) or accept the 15% top-up and remodel returns. Every Vietnamese tax incentive currently enjoyed should be re-modelled through the QDMTT lens — incentives keep full value for groups below the EUR 750 million threshold, but are largely neutralised for large groups.
Frequently asked questions
Are groups below EUR 750 million affected?
Not directly. The EUR 750 million consolidated revenue threshold triggers Pillar Two. Still, the transparency and substance trend is spreading into domestic anti-avoidance rules, so shell structures remain risky.
Do Vietnamese tax incentives still matter after QDMTT?
For large in-scope groups, tax holidays in Vietnam get clawed back through top-up tax — the incentive loses most tax value but keeps procedural, land and compliance benefits. For sub-threshold businesses, incentives keep full value.
How many staff does a pure Hong Kong holding company need?
Hong Kong’s FSIE applies a reduced test for pure equity-holding companies: meet registration and filing duties and maintain adequate people and premises for the holding activity. There is no fixed number; the Inland Revenue Department assesses each case on its totality.
Should we shut the Singapore/Hong Kong companies to avoid trouble?
Do not rush. If the entity performs real functions (regional management, treasury, procurement), it creates value and earns the substance carve-out. Only pure shells need restructuring.
FLAT Law Firm advises on regional ownership restructuring, Pillar Two impact reviews and building substance that satisfies tax authorities across jurisdictions. Contact our lawyers to review your current structure.
This article has been quality-reviewed by the FLAW AI Legal Council