Two-tier profits tax in Hong Kong

Hong Kong taxes profits that arise in or are derived from Hong Kong. The rates below are what theInland Revenue Department’s two-tier FAQand theprofits tax pagepublish. A directory cannot tell you what you owe.

The two rates

From the year of assessment 2018/19, a corporation pays 8.25% on the first HK$2 million of assessable profits and 16.5% on the rest. An unincorporated business — mostly a partnership or a sole proprietorship — pays 7.5% and then 15%. Those figures are half of the ordinary corporation rate in Schedule 8 and half of the standard rate.

The charge is territorial. A resident can earn profits abroad without profits tax here; a non-resident can still be taxed on profits that arise in Hong Kong. Whether a profit arises here is a question of fact. Remitting foreign profits to Hong Kong does not, by itself, make them taxable.

One nominated entity in a connected group

Every entity with profits chargeable to profits tax in Hong Kong qualifies for the two-tier rates, except those with a connected entity that has been nominated instead. If, at the end of the basis period, the entity has one or more connected entities, only the nominated one uses the lower tier. The others pay 16.5% or 15% on the whole of their assessable profits.

Entities are connected where one controls the other, both sit under the same controlling entity, or the same natural person runs more than one sole proprietorship. Control is generally more than 50% of issued share capital, voting rights, or capital or profits, directly or through other entities.

The nominated entity elects in its profits tax return (or the individual’s tax return, for a sole proprietorship) that it is chargeable at the two-tier rates and that no other connected entity elects the same way that year. Once made, that election is irrevocable for that year. A different connected entity may elect in a later year if the conditions are still met.

Two sole proprietorships owned by the same person cannot both take the lower tier. The IRD treats each business as a separate entity and restricts the two-tier rates to the one that elects.

When the two-tier rates do not apply

A corporation that has elected under the concessionary regimes the FAQ lists — sections 14B, 14D, 14H, 14J, 14P or 14T of the Inland Revenue Ordinance — does not qualify for the two-tier rates. If an election is ineffective, or nobody in a connected group elects, the whole of the assessable profits are charged at 16.5% or 15%.

An entity with no connected entity still has to declare that fact, or simply declare that it is chargeable at the two-tier rates. An incorrect declaration that there is no connected entity, or that nobody else has elected, can draw heavy penalties and an additional assessment on the ordinary rates.

Personal Assessment is a separate election. The IRD notes it can produce a higher bill than the schedular two-tier calculation when you have several income sources. That is a figure for your tax adviser, not a directory.

How the books are kept, and which return a company files, sit onprofits tax and business records. A sole proprietor reports profits on Part 5 of BIR60 —sole proprietorship tax. Employer filings are a different office:the employer’s return.

Nothing here is tax advice. If the number matters, use the IRD page or someone who will sign their name to the computation. If you want a firm to keep the books, start withthe accounting listings.