Two-tiered profits tax rates regime

Loren Chan

Hong Kong is well known for its low and simple tax regime. For years, Hong Kong adopts a flat profits tax rate and the current tax rate is 16.5%.  Facing increased global competition, our Chief Executive, Mrs. Carrie Lam proposed a two-tiered profits tax rates regime in the 2017 Policy Address. On 29 March 2018, the Inland Revenue (Amendment) (No.3) Ordinance 2018 was gazetted to implement the two-tiered profits tax rates regime proposed by the Chief Executive. The two-tiered profits tax rates regime applies to both corporations and unincorporated businesses in any year of assessment commencing on or after 1 April 2018.

Under the new regime, the profits tax rates for corporations and unincorporated businesses are as follows:

  Corporations Unincorporated businesses (i.e. sole proprietorship and partnerships)
For the first HK$2 million profits 8.25% 7.5%
Profits above HK$2 million 16.5% 15%

To avoid abusing the tax relief, the Amendment Ordinance restricts the application of the two-tiered rates to only one entity nominated among “connected entities”. In broad terms, an entity is a connected entity of another entity if:

  • one of them has control over the other;
  • both of them are under the control of the same entity; or
  • in case of the first entity being a natural person carrying on a sole proprietorship business, the other entity is the same person carrying on another sole proprietorship business.

In case there are two or more connected enterprises elect for the two-tiered rates for the same year of assessment, the election will be revoked by the Inland Revenue Department.

Taxpayers who have already elected for other preferential half-rate tax regimes (e.g. qualifying professional reinsurance business, authorised captive insurance business, qualifying corporate treasury centre, qualifying aircraft lessor and qualifying aircraft leasing manager) will not qualify for the two-tiered rates. However, a taxpayer can still qualify for the two-tiered profits tax rates in respect of its assessable profits derived from normal trading receipts even though part of its assessable profits is derived from qualifying debt instruments subject to concessionary tax rates.

The new regime is generally welcomed by the business sector. The above change will not only benefit small and medium enterprises, start-up enterprises but all eligible enterprises with assessable profits, regardless of their size.

 To enjoy the benefit, the entity that is nominated to elect for the two-tiered profits tax rates should make the election in the 2017/18 Profits Tax Return accordingly. 

All entities should review its 2018/19 provisional profits tax imposed by the Inland Revenue Department and the impact under the new regime to determine if it needs to apply for a holdover.