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Rosemont: Update on Hong Kong’s two-tiered profits tax rates regime

On 29 March 2018, the Hong Kong Government published the Inland Revenue (Amendment) (No. 3) Ordinance 2018, implementing a two-tiered profits tax rate regime to take effect on 1 April 2018, with the aim of establishing a favourable business environment, driving economic growth and enhancing Hong Kong's competitiveness.

Under the scheme:

• The small and medium-sized enterprises (“SMEs”) will receive a boost from the Government in a bid to lower the tax burden for SMEs;
• The tax rate for the first HK$2 million (US$254,800) of company profits will be lowered to 8.25% instead of 16.5%, which corresponds to half of the standard profits tax rate;
• The profits of over HK$2 million will continue to be subject to the tax at 16.5%;
• For unincorporated businesses, generally made up of partnerships and sole proprietorships, the two-tiered tax rates will correspondingly be set at 7.5% (for the first HK$2 million of profits) and 15% (over HK$2 million of profits); and
• Implementation of some restrictions to avoid potential abuses of a group of “connected entities”. In a nutshell, one enterprise group may only nominate one entity to benefit from the tax reduction.

The main goal of these changes is to maintain Hong Kong’s position as a leading global business hub and a robust well-regulated centre for investments purposes.

The companies which have elected for the preferential half-rate tax regime (including concessionary regimes for reinsurance business, captive insurance business, corporate treasury centres, aircraft leasing business or aircraft leasing management business) will not be able to benefit from the tax reductions.

All in all, it is largely expected that the two-tiered profits tax rate regime will help more than 130,000 local companies. Corporations and unincorporated businesses might save up to HK$165,000 and HK$150,000 respectively each year.