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The Inland Revenue (Amendment) (No. 7) Bill 2017 (Amendment Bill) was gazetted on 29 December 2017 to introduce a two-tiered profits tax rates regime in Hong Kong.
Under the new two-tiered profits tax rates regime which will apply to both corporations and unincorporated businesses, the applicable profits tax rates will be as follows:-
For corporations, the profits tax rate for the first HK$2 million of profits earned will be lowered to 8.25% (i.e. half of the current profits tax rate for corporations). Profits above HK$2 million earned by a company will continue to be subject to the standard profits tax rate of 16.5%.
For unincorporated business, the profits tax rate for the first HK$2 million of profits earned will be lowered to 7.5% (i.e. half of the current profits tax rate for unincorporated business). Profits above HK$2 million earned by a company will continue to be subject to the standard profits tax rate of 15%.
No Double Benefits
In order to avoid double benefits, it has been proposed that the following enterprises will be excluded from the two-tiered profits tax rates regime:-
Restrictions on the Application of the New Tax Regime
To ensure that the proposed tax measure will benefit targeted small and medium enterprises (SMEs) and to prevent the splitting of business activities/profits between related entities, certain restrictions have been introduced such that each group of connected entities may only nominate one entity in the group to benefit from the lower tax rates.
According to the Amendment Bill, an entity is a connected entity of another entity if:-
The definition of “an entity has control over another entity”” in the above context is also given in the Amendment Bill.
2018/19 Provisional Tax
The Amendment Bill contains transitional provisions affording taxpayers an additional ground for applying for holdover their 2018/19 provisional profits tax if they consider that they are, or likely to be, chargeable to profits tax under the proposed two-tier profits tax rates regime.
The Hong Kong Government believes that the introduction of the new two-tiered profits tax rates regime will promote economic development and reduce the tax burden on enterprises, especially SMEs and startup businesses in Hong Kong. The Hong Kong Government also envisages that the new tax regime will help foster a favourable business environment, drive economic growth and enhance Hong Kong's competitiveness.
Moreover, the tax savings by enterprises can be reinvested in upgrading their hardware or software, thereby boosting their overall operation and efficiency. Overall, it is envisaged that the two-tiered profits tax rates regime will gain international publicity mileage in promoting Hong Kong as a preferred investment destination.
The Amendment Bill is currently being reviewed by the Bills Committee of the Legislative Council. The Bills Committee has held its first meeting to discuss issues related to the Amendment Bill on 24 January 2018. Subject to the enactment of the legislation, the two-tiered profits tax rates regime will apply starting from the year of assessment 2018/19 (i.e. on or after 1 April 2018),
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