The Introduction of Two-Tiered Profits Tax Rates System

Originally announced by the Chief Executive in her maiden Policy Address in October 2017, the introduction of the two-tiered system is the HKSAR Government’s objective to adopt a competitive taxation system to promote economic development while maintaining a simple and low tax regime fostering a favourable business environment in Hong Kong, in particular for most taxpaying small and medium size enterprises.

The two-tiered profits tax regime is applicable to both corporations and incorporated businesses with assessable profits regardless of their size and industry. The applicable tax rates are as follows:

• The profits tax rate of the first HK$ 2 million of assessable profits of corporations will be lowered to 8.25% and the remaining amount of its assessable profits will be subject to the standard tax rate of 16.5%.
• The profits tax rate for an unincorporated business will be 7.5% on its first HK$ 2 million of assessable profits and 15% on the remaining amount of its assessable profits.

To avoid double benefits of a taxpayer, if a corporation has made an election for applying the 8.25% concessionary tax rate to a portion of its assessable profits under any of the concessionary regimes for qualifying reinsurance business, qualifying captive insurance business, qualifying corporate treasury centres or qualifying aircraft leasing / leasing management business, its remaining assessable profits will be subject to profits tax rate of 16.5%. In addition, for businesses with the assessable profits derived from qualifying debt instruments (“QDI”) which are already taxed at half of the standard tax rate (8.25% / 7.5%), the profits tax rate of the first HK$ 2 million threshold under the two-tiered profits tax regime would still apply to their profits that are not derived from QDIs.

On the other hand, certain restrictions have been introduced to prevent the splitting of business activities / profits between related entities to enjoy the reduced profits tax rate. Each group of connected entities may only nominate one entity in the group to elect in writing to enjoy the reduced profits tax rate for a year of assessment and such election, once made, is irrevocable. An entity is a connected entity of another entity if:

• One of them has control over the other; or
• Both of them are under the control of the same entity which has “control” by virtue of having 50% direct or indirect shareholding, voting rights or entitlement to capital or profits of an entity; or
• Two sole proprietorship businesses carried on by the same nature person.

Should you require further details or assistance on the above, please contact Sylvester Chu at tax@zetland.biz.