On 25 June 2002, the Government first publicly indicated that it was considering the possibility of a merger between the Corporation and the MTRCL. In February 2004 the Government invited the two corporations to commence discussions on a possible merger. In September 2004 the corporations submitted a joint merger report to the Government.

In April 2006 the Government and the MTRCL signed a non-binding Memorandum of Understanding on the structure and terms for the proposed merger.

In June 2007 the Legislative Council passed the Rail Merger Bill, and subsequently in July the by-laws and regulations of the merged company were also passed. In August 2007 the Corporation's Managing Board gave its approval to the signing of the merger transaction documents. In October 2007, MTRCL's independent shareholders approved the merger package at an Extraordinary General Meeting.

On 2 December 2007 the Rail Merger Ordinance came into effect. The Rail Merger Ordinance expressly empowered KCRC to grant a service concession to MTRCL and expanded the scope of MTRCL's franchise to enable it to take up the operation of KCRC's transport services.

The rail merger comprised two key components. The first was a Service Concession Agreement whereby MTRCL was granted the right for an initial period of 50 years (which is extendable) from 2 December 2007 to use KCRC's railway assets to operate the existing KCR railway lines and other transport-related businesses such as bus operations in the North-west Transit Service Area, and upon their completion, the new KCR railway lines currently under construction. In return, the MTRCL must make a fixed annual payment of HK$750 million to KCRC, and after 36 months, an additional variable payment based on a percentage (which is on a sliding scale) of the annual revenue in excess of HK$2.5 billion generated from the KCRC railway assets.

The second key component was a Sale and Purchase Agreement, whereby on 2 December 2007 MTRCL purchased at a sum of HK$7.79 billion a number of KCRC properties and property management subsidiaries, and made a further payment of HK$4.25 billion for the Service Concession and the purchase of certain railway assets of KCRC such as stores and spares.

After the rail merger, KCRC has become primarily an asset holding corporation under the direction of a Managing Board composed wholly of public office holders appointed by the Chief Executive of the Hong Kong Special Administrative Region. The Corporation is now served by a very small number of staff, having decided to outsource many of its routine administrative and specialist support functions. The Board is chaired by the Secretary for Financial Services and the Treasury of the HKSAR Government, and the management is headed by a Chief Officer.