HK adopts two-tiered profits tax system

The Inland Revenue (Amendment) (No. 3) Ordinance 2018 was gazetted on 29 March 2018, to implement the two-tiered profits tax rate regime as announced in the chief executive’s 2017 policy address. The new regime is aimed at enhancing Hong Kong’s competitiveness by reducing the tax burden on enterprises, especially small and medium-sized enterprises (SMEs).

In general, under the ordinance, the first HK$2 million (US$255,000) of profits of incorporated and unincorporated enterprises will be taxed at half the applicable standard rate. For corporations, the profits tax rate for the first HK$2 million of profits will be reduced to 8.25%, while profits beyond the first HK$2 million will continue to be subject to the standard rate of 16.5%. For unincorporated businesses such as sole proprietorships, the profits tax rate for the first HK$2 million of profits will be reduced to 7.5%, while the standard rate of 15% will continue to apply to profits above HK$2 million. These new rules will apply for the years of assessment commencing on or after 1 April 2018. The benefit will be available universally to all businesses, subject to the limit on connected entities as discussed below.

Connected entities. Where there are two or more “connected entities”, only one of them will be eligible to the reduced tax rate, as the intended targets of the tax benefits are primarily SMEs. This restriction is intended also to avoid possible abuse of the regime by splitting businesses.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at danian.zhang@bakermckenzie.com