Two-tiered Profits Tax Rates Regime

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

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All entities with profits chargeable to Profits Tax in Hong Kong would qualify for the two-tiered profits tax rates, except those with a connected entity which is nominated to be chargeable at the two-tiered rates. See Q3 below.

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If, at the end of the basis period of the entity for the relevant year of assessment, the entity has one or more connected entities, the two-tiered profits tax rates would only apply to the one which is nominated to be chargeable at the two-tiered rates. The others would not qualify for the two-tiered profits tax rates. See Q8 below. Further, if a corporation has made an election under section 14B(2)(b) (qualifying insurance business and insurance brokerage business), section 14D(5)(b) (qualifying corporate treasury centre), section 14H(4)(b) (qualifying aircraft lessor), section 14J(5)(b) (qualifying aircraft leasing manager), section 14P(4)(b) (qualifying ship lessor) or section 14T(5)(b) (qualifying ship leasing manager), the corporation would not qualify for the two-tiered rates.

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Yes. The taxpaying entity can still qualify for the two-tiered profits tax rates in respect of its assessable profits derived from normal trading receipts.

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An entity means –

If a natural person carries on more than one sole proprietorship business, the person is taken to be a separate entity in relation to each sole proprietorship business.

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An entity is a connected entity of another entity if –

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Generally, an entity has control over another entity if the first-mentioned entity, whether directly or indirectly through one or more than one other entity,

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The two-tiered profits tax rates would not apply to the taxpaying entity. The whole of the taxpaying entity's assessable profits will be chargeable to Profits Tax at the rate of 16.5% or standard rate of 15%, as applicable. However, the Commissioner may apply the two-tiered profits tax rates to one of the connected entities for a year of assessment if that entity elects the two-tiered rates.

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The nominated entity may make the election by declaring in its Profits Tax Return (for corporations and partnerships) or Tax Return – Individuals (for sole proprietorships) that it is chargeable at the two-tiered profits tax rates for the relevant year of assessment whereby no other connected entity elects to be so chargeable. Once the election is made, it is irrevocable for that year. However, a different connected entity may elect the two-tiered profits tax rates for a different year of assessment if all conditions are met.

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No. An entity's election is effective only if no other connected entity has made an election for the same year of assessment. However, a different connected entity may elect the two-tiered profits tax rates for a different year of assessment if all conditions are met.

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Subject to other applicable provisions of the IRO, the whole of the taxpaying entity's assessable profits will be chargeable to Profits Tax at the rate of 16.5% or 15%, as applicable.

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No. If a natural person owns two or more sole proprietorship businesses, the person is taken to be a separate entity in relation to each sole proprietorship business. The application of the two-tiered profits tax rates will be restricted to only one of the sole proprietorship businesses which has made an election. Other sole proprietorship businesses (and other connected entities) would be subject to Profits Tax at the rate of 15% or 16.5%, as the case may be.

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The taxpaying entity has to declare that it has no connected entity at the end of the basis period for the relevant year of assessment. For administrative convenience, the taxpaying entity can simply declare in its tax return that it is chargeable at the two-tiered profits tax rates.

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If an individual taxpayer elects for Personal Assessment, the tax will be calculated at progressive tax rates on the aggregated income from all sources, including the profits derived from his or her unincorporated businesses. Thus, the tax calculated under Personal Assessment may be higher than that calculated under the schedular basis where the individual taxpayer can nominate one of his or her businesses for electing the two-tiered profits tax rates.

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Given that the non-resident person has no connected entity or none of its connected entity/(entities) elects to be so chargeable for the relevant year of assessment, its Assessable Profits can be chargeable at the two-tiered profits tax rates. On completion of the Profits Tax Return (Form BIR 54) for the non-resident person, the subject Hong Kong payer is required to check with the non-resident person to ascertain whether any one of the above criteria for the two-tiered profits tax rates has been met. If so, the Hong Kong payer can declare in the relevant Profits Tax Return that the non-resident person is chargeable at the two-tiered profits tax rates. However, the part of the Assessable Profits of the non-resident person chargeable at the lower rate under the two-tiered profits tax rates for the relevant year of assessment cannot exceed $2 million in total, whether assessed in the subject Hong Kong payer's name or other payers' names.

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No. The Hong Kong payer needs to ascertain from the non-resident person as to whether it has no connected entity at the end of the basis period under two-tiered profits tax rates regime or none of its connected entity/(entities) elects to be chargeable at the two-tiered profits tax rates for the relevant year of assessment. A relevant declaration in Profits Tax Return (Form BIR54) could then be made. Even if the non-resident person should be chargeable at two-tiered rates, it is also possible that the Hong Kong payer is not the only payer who has reported profits for it. Under such circumstances, at the time of payment to the non-resident person, the Hong Kong payer should retain the amount of tax payable assuming that the non-resident person is not chargeable at two-tiered rates.

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Profits Tax will be chargeable on the first $2 million of assessable profits at the lower rate of 7.5% or 8.25% (for a corporate partner's share of assessable profits). Assessable profits above the threshold will be subject to the higher rate of 15% or 16.5% (for a corporate partner's share of assessable profits). Where applicable, the threshold of $2 million will be apportioned amongst the corporate partners and non-corporate partners in accordance with their profit sharing ratios.

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No. This ground is not applicable for the years of assessment other than 2018/19.

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Yes, the provisions of the IRO concerning objections and appeals, and repayment of tax are applicable.

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Heavy penalties may be imposed for making an incorrect return without a reasonable excuse. Additional assessments will be raised in accordance with the provisions of the IRO on the taxpaying entity on the basis that the two-tiered profits tax rates do not apply.