Two-Tiered Profits Tax Regime

 In Hong Kong

The two-tiered profits tax rates regime becomes effected from the year of assessment 2018/19. Under the regime, the first HK$2,000,000 is taxed at half of the rate, i.e.

  • Limited company at 8.25%
  • Sole proprietorship at 7.25%
  • Partnership at 7.25%

The portion of assessable profits above HK$2,000,000 is taxed at normal rates, i.e. 16.5%/15%.

When “connected entities” are involved, only one of them can be nominated to the entitlement of the two-tiered profits tax rates in a year of assessment. However, the nominated entity can be changed from one year to another year depending on the profit/loss situation of the connected entities.

What are “Connected Entities”

  • “Entity” includes sole proprietorship, partnership and limited company.
  • An entity (“A”) is a connected entity of another entity (“B”) if:​
    • A/B has control over B/A; or
    • Both A and B are under the control of the same entity, say, C.
  • If there is a natural person, say, Mr. X who carries on 2 sole proprietorship business, say, P and Q, P and Q are connected entities.

What is Control

In general, A has control over B if A, whether directly or indirectly:

  1. Owns or control more than 50% in aggregate of the issued share capital of B; or
  2. Is entitled to exercise or control the exercise of more than 50% in aggregate of the voting rights in B; or​
  3. Is entitled to more than 50% in aggregate of the capital or profits of B​

Business group should check amongst itself what are the connected entities involved and make sure that only one of the connected entities would be nominated to the entitlement of the two-tiered profits tax rates in a year of assessment. Please note that the Inland Revenue Department may impose heavy penalties for incorrect declaration/nomination with an aim to take advantage of the two-tiered profits tax rates regime.

Please feel free to contact us for more detailed discussion.