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  • Writer's pictureMichael Chan - Bida & Co.

Two-tiered Profits Tax Rates Regime

On March 29, 2018, the Inland Revenue (Amendment) (No. 3) Ordinance 2018 became law. With effect from the year of assessment 2018/19, the amending law has reduced the tax rate for the first $2 million of assessable profits, introducing two-tiered profits tax rates for corporations and unincorporated businesses. However, only one connected entity can choose the two-tiered profits tax rates when there are two or more connected entities.


1. What are the two-tiered profits tax rates?

For the first $2 million of assessable profits, the profits tax rate will be reduced to 8.25% (half of the rate specified in Schedule 8 to the Inland Revenue Ordinance (IRO)) for corporations and to 7.5% (half of the standard rate) for unincorporated businesses under the two-tiered profits tax rates regime (mostly partnerships and sole proprietorships). Assessable income beyond $2 million will continue to be subject to the rate of 16.5% for corporations and standard rate of 15% for unincorporated businesses.


2. Which taxpaying entities would qualify for the two-tiered profits tax rates?

Except for those with a related entity that is designated to be taxable at the two-tiered rates, all entities with profits chargeable to Hong Kong's profits tax would be eligible for those rates.


3. What is an entity?

An entity is –

(a) a natural person;

(b) a group of persons; or

(c) a legal arrangement, including a corporation, a partnership, and a trust.


A natural person is taken as a separate entity for EACH sole proprietorship business if he or she carries on more than one sole proprietorship business.


4. How to define a "connected entity"?

An entity is a connected entity of another entity if -

(a) one of them has power control over the other;

(b) both of them are controlled by the same entity; or

(c) in the case of the first entity being a natural person carrying on a sole proprietorship business, the other entity is the same natural person carrying on another sole proprietorship business.


5. How to define “control”?

Generally, if one entity has power over another, whether directly or indirectly through one or more other entities,


(a) has the right to exercise or control the exercise of more than 50% of the issued share capital of the latter company; (b) is entitled to more than 50% of the voting rights in the latter entity; or (c) has the right to more than 50% of the capital or earnings of the latter business.


Example 1

Corporation with assessable profits below $2,000,000

For the year of assessment 2018/19, Company A declares assessable profits of $1,500,000. Since Company A has no connected entity, its Profits Tax should be calculated as below:


Before implementation of the two-tiered profits tax rates


After implementation of the two-tiered profits tax rates regime


Assessable profits should be charged at 8.25%.

The tax savings of Company A resulting from charging two-tiered profits tax rates for final tax 2018/19 and provisional tax 2019/20 will be $247,500.


Example 2

Corporation with assessable profits over $2,000,000

For the year of assessment 2018/19, Company B declares assessable profits of $2,500,000. Since Company B has no connected entity, its Profits Tax should be calculated as below:

Before implementation of the two-tiered profits tax rates


After implementation of the two-tiered profits tax rates regime


Assessable profits of first $2,000,000 should be charged at 8.25% and the remainder of $500,000 should be charged at 16.5%.

The tax savings of Company B resulting from charging two-tiered profits tax rates for final tax 2018/19 and provisional tax 2019/20 will be $330,000.

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