Hong Kong Companies: Partial Tax Exemption for Two-Tier Tax Rates

Hong Kong Companies: Partial Tax Exemption for Two-Tier Tax RatesCorporations and unincorporated businesses in Hong Kong can pay lower profit tax rates under the two-tier tax rate for the first $2 million of assessable profits.

 

Profit Tax Rates

All Hong Kong taxpayers are subject to the same business tax rate for either a corporation or unincorporated business irrespective of their residential status. However, permanent or temporary residents of Hong Kong, except a person under the age of 18 (unless both his parents have passed away), may obtain financial relief from the standard rate of tax on their profits and income by electing to be assessed under Personal Assessment. This relief is offered where the tax computed under Personal Assessment is less than the aggregate amount of the tax charged separately under profits tax, salaries tax and property tax.

Profits Tax Rates can be divided into the following:

Normal Rate

  • Applies for the year of assessment 2008/09 onwards)
  • Corporations: 5%
  • Unincorporated Businesses: 15%

Two-tiered Rates

  • Applies for the year of assessment 2018/19 onwards)

The applicable two-tiered tax rates are as follows

TWO-TIER TAX RATES
Assessable Profits Corporations Unincorporated Businesses
First HK$2,000,000 8.25% 7.5%
Over HK$2,000,000 16.5% 15%

 

Concessionary rate

Concessionary tax rates at 50% of the normal profits tax rate may be applied to:

  • Trading profits and interest income received or derived from ‘short/ medium-term debt instruments’ issued before 1 April 2018.
  • Profits of the offshore business of a professional reinsurer, or authorized captive insurer obtained from the year of assessment 2013/14 onwards.
  • Qualifying profits of a qualifying corporate treasury centre obtained from the year of assessment 2016/17 onwards.
  • Qualifying profits of a qualifying aircraft lessor or a qualifying aircraft leasing manager obtained from the year of assessment 2017/18 onwards.

Hong Kong Companies: Partial Tax Exemption for Two-Tier Tax Rates

Exclusions

Certain enterprises will be excluded from the two-tier profits tax rates in order to avoid any double benefits.

These enterprises include:

  • Those that elect the concessionary half-rate tax regimes as listed above (e.g., professional reinsurance companies, captive insurance companies, corporate treasury centres and aircraft leasing companies).
  • Holders of qualifying debt instruments that receive or accrue assessable profits for sums as interest, gains or profits should already be taxed at half the rate (7.5% or 8.25%, as the case, maybe)
  • If an enterprise is a group of companies in Hong Kong, only one company in the group will be eligible for the two-tiered profits tax regime.

It is also important to note that any taxpaying entity that incorrectly declares that it has no connected entity or has no other connected entity that made an election for two-tiered profit tax rates will be subject to heavy penalties for making an incorrect return without a reasonable excuse.