Two-Tier Profits Tax Regime: An Introduction

An important feature of Hong Kong’s tax system is that of the two-tier profit tax regime. This tax regime fine-tunes Hong Kong’s tax system to better meet the needs of both the government and taxpayers.

Hong Kong’s Two-Tier Profits Tax Regime

The two-tier profits tax regime which exists in Hong Kong today first came into existence on March 29, 2018. On that date, the Inland Revenue (Amendment) (No. 3) Ordinance 2018 came into effect. The primary effect of this ordinance was that of introducing the new tax regime. It also served to amend certain segments of the Inland Revenue Ordinance, which was implied by its full title. Some of the portions of the Inland Revenue Ordinance which received edits included Section 14, Section 19CA, Section 63H, and Section 63HA. It also amended Schedule 1 and Schedule 8.

The two-tier profits tax regime of Hong Kong applies to all businesses in Hong Kong regardless of their incorporation status. It places different tax requirements on Hong Kong businesses depending on their respective incorporation status. Businesses which have already been incorporated will have their first HK$2 million of profits taxed at half of the current corporate tax rate of Hong Kong. Thus, such profits will be taxed at a rate of 8.25%. The remainder of the profits will be taxed at Hong Kong’s usual corporate tax rate of 16.5%. Unincorporated businesses are taxed 7.5% on their first HK$2 million of profits in Hong Kong. The remainder of such a business’s profits are to be taxed at a rate of 15%.

Unlock the Benefits of Incorporating Your Business in Hong Kong

On a related note, there are many advantages associated with the ownership of a business which has been incorporated in Hong Kong. If you would like to benefit from such advantages, we at Paul Hype Page & Co. will be able to serve your needs suitably. Our team understands much about company incorporation in Hong Kong and will do everything necessary to facilitate the establishment of your new Hong Kong company. Through our assistance, your company based in Hong Kong will be able to begin its business operations optimally.

Further Details About the Two-Tier Profits Tax Regime

Also, laws surrounding Hong Kong’s two-tier profits tax regime include information about connected entities. Hence, legislation defines connected entities to ensure only one taxpayer in a connected group benefits from tax reductions. Therefore, for this purpose, the group will need to provide the identity of the entity which will benefit after reaching a consensus through a vote. The selection of the entity in question cannot be revoked for the relevant year of assessment.

Exemptions

Taxpayers of Hong Kong who have received benefits from other preferential tax regimes which are similar to the two-tier profits tax regime may not benefit from it. Such tax regimes include entities such as captive insurance companies, aircraft leasing companies, professional reinsurance companies, and corporate treasury centres. Furthermore, all profits which are derived from any qualifying debt instruments which are already to be taxed at any concessionary tax rates are also excluded from taking advantage of the two-tier profits tax regime. Hong Kong tax authorities ensure no unethical practices are used to exploit benefits from the new tax regime.