Two-Tiered Profits Tax Rates Regime in Hong Kong
6 minute read
The Inland Revenue Bill 2017 (Profits Bill) was amended three years ago to make the Hong Kong tax environment more competitive.
The main reasons why the Profits Tax bill was introduced is to promote economic development while maintaining a simple and low tax regime at the same time.
Below you will find more in-depth information regarding this tax rate regime.
Overview:
- Why was the Profits Tax bill designed?
- Who qualifies for it?
- The rules of Two-Tiered Profits Tax Rates Regime
Why was it designed?
As previously mentioned, the key objectives of this bill were to maintain a competitive tax system and thus promote economic development while keeping a simple and low tax regime.
The government designed the two-tiered profit tax Hong Kong regime to:
- Reduce the overall tax burden on enterprises, especially for small and medium companies.
- Enable companies to reinvest tax savings in upgrading hardware and software to boost their overall operations and efficiency.
- Allow more successful social enterprises to pursue their social objectives by alleviating their tax burden.
- Improve the status of Hong Kong as an appealing investment jurisdiction.
The two-tiered profits tax regime applies to both corporations and unincorporated businesses. It came into effect in the 2018/19 year of assessment.
Who is qualified? Does it vary by citizenship?
Every entity with profits chargeable to Profits Tax in Hong Kong can qualify for the two-tiered profits tax rates. However, this does not include companies that have a connected entity nominated to use the two-tiered tax rates.
If the company has one or more connected entities at the end of the basis period of the entity for the relevant year of assessment, then the two-tiered profits tax rates only apply to that which has been nominated to receive the two-tiered rates.
Other entities do not qualify for the two-tiered rates and must pay the standard tax amount.
In addition, it is important to note that these propositions do not vary by citizenship. Every business in Hong Kong has to follow the laws of the regional governing authorities.
What is a connected entity?
A connected entity is an entity that:
- Has control over the other entity.
- Is connected and controlled by the same entity.
If the first entity is a natural person with a sole proprietorship business, the other entity is the same person with a different sole proprietorship business.
Can more entities use two-tiered profits tax rates?
This is not possible according to the current rules.
An entity can only use the two-tiered profits tax rates if no other connected entity has been elected to use them for the given year of assessment.
However, another connected entity can use the two-tiered rates during a different year of assessment, provided they meet all other conditions.
So, Entity A could claim them one year, and Entity B could claim them the next year – in which case Entity A has to use the standard tax rates.
Now that we have covered the basics, let’s move on to the rules of this tax rate regime.
The rules of Two-Tiered Profits Tax Rates Regime
The regime in question that commenced on 1 April 2018 has the following tax rates:
| Assessable profits | Corporations | Unincorporated businesses |
| First HK$2 million | 8.25% | 7.5% |
| Over HK$2 million | 16.5% | 15% |
As you can see, for corporations, the first HK$2 million of profit earned by a company will be taxed at half the current tax rate (8.25%) whilst the remaining profits will continue to be taxed at the regular 16.5% tax rate. For unincorporated businesses, the first HK$2 million of profits earned will be taxed at half of the current tax rate (i.e., 7.5%) whilst the remaining profit will be taxed at the existing 15% tax rate.
Take a look at the enterprises that are excluded from the two-tiered profiles tax regime. This is done to avoid double benefits.
- Enterprises electing the preferential half-rate tax regimes (professional reinsurance companies, captive insurance companies, etc.).
- The assessable profits for sums received by or accrued to holders of qualifying debt instruments as interest, gains, or profits should already be taxed at half the rate (7.5% or 8.25%).
An anti-fragmentation measure was implemented to prevent corporate activities from being divided among a large number of companies that could benefit from the lower tax rate.
Each group has to nominate only one company in a body of companies to benefit from the progressive rate.
Restrictions
It is worth underlining that only one company in a group of companies (owned by the same entity) located in Hong Kong can adopt two-tier tax rates.
The remainder of connected companies of the group shall remain on the standard tax rate which stands at 16.5%.
Let’s move on and see what amendments have been made to the Inland Revenue Ordinance following the introduction of the bill.
Wrap Up
The reasoning behind the introduction of this regime was simple — if global tax rates decrease, HK has to follow the trend.
That is the only way to attract foreign investments if the region plans to remain an appealing destination for entrepreneurs and businessmen from all around the globe.
The Profits Tax bill is a valuable economic aid for small and medium enterprises in the region. It is also beneficial for the Hong Kong tax system since it helps to maintain its position as Asia’s leading international business centre.
All in all, this is an important and constructive regime that every responsible business owner should try to take full advantage of. So, do not hesitate to incorporate your Hong Kong company.
If there is anything unclear or uncertain, feel free to contact Sleek for more information. If you need assistance with the incorporation process, you can also contact Sleek for help.
