Changes in Hong Kong profits taxation system

Changes in Hong Kong profits taxation system

1 April 2018 the Inland Revenue (Amendment) Ordinance came into force in Hong Kong. The basic change is introduction of two tiered profits tax rate regime for legal entities and unincorporated businesses that receive incomes from activity in Hong Kong and/or from sources in Hong Kong.

The following profits tax rates will be effective starting from year of assessment 2018-2019 (for tax periods that ended on 1 April 2018) and onwards:

Taxable profit
Legal entities
Unincorporated businesses (sole proprietorship, partnership, trust)
Less than 2 000 000 Hong Kong Dollars (HKD) Tax rate 8.25 % Tax rate 7.5 %
Over 2 000 000 HKD Tax rate 16.5 % Tax rate 15 %

If taxable profit exceeds 2 000 000 HKD (that equals approximately 255 000 US Dollars), legal entities profits tax rate 16.5 % will apply only to that part of profits that exceeds 2 000 000 HKD, but not to the whole amount of such profits. The same rule is applicable to unincorporated businesses with corresponding tax rates.

The Inland Revenue (Amendment) Ordinance provides that the following companies are excluded from two tiered profits tax regime:

  • professional reinsurance companies, captive insurance companies, corporate treasury centers and aircraft leasing companies;
  • entities that already use preferential tax regime due to reception of profits from qualifying debt instruments.

In addition, two tiered profits tax regime for groups of connected entities is also restricted. Only one entity of such group can be selected by taxpayer to apply this regime. One entity is deemed to be connected entity of another in following cases:

  • one of them has control over the other by holding more than 50 % of shares, participation interest or voting rights;
  • all of them are under control of the same entity by holding more than 50 % of shares, participation interest or voting rights;
  • if the first entity being a natural person carrying on a sole proprietorship business—the other entity is the same person carrying on another sole proprietorship business.

All abovementioned restrictions were designed to prevent the abuse of right to lower tax rate by using more than one basis for it and to prevent business from being divided amongst a large number of companies for purposes of using lower tax rate.

It is necessary to mention that Hong Kong applies territorial basis of taxation: profits tax is applicable only to income from activity on the territory of Hong Kong or from sources in Hong Kong. Other profits are not taxable in Hong Kong.

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