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The Two-Tier Profits Tax System in Hong Kong

The Two-Tier Profits Tax System in Hong Kong

Hong Kong will introduce a new two-tier tax system starting with the year of assessment 2018/2019. A new Amendment to it was gazetted at the end of March and it brings some clarifications, compared to the one that was gazetted in December 2017. 

The two-tier tax system could mean that the tax burden for small and medium-sized companies in Hong Kong will be reduced, a welcomed measure for all those who are interested in company formation in Hong Kong.

A technical amendment to the two-tier system Bill

The Inland Revenue (Amendment No.3) Ordinance 2018, the one that implements the two-tier profits tax system in Hong Kong was already been gazetted. Compared to the Bill that was already gazetted on this mater in December, the difference included in this Ordinance is that it includes a clarification in the process of assessing profits that derive from qualifying debt instruments. The clarification was needed because these are already taxed at half of the standard profits tax in Hong Kong.

Profits from qualifying debt instruments would not be counted towards the threshold imposed for the application of the two-tier rates. Companies will continue to benefit from paying half the rate on these types of profits.

What to expect from the new taxation system

The two-level taxation system could represent an important and welcomed changed for investors who open a Hong Kong company that qualifies as a small or medium-sized enterprise. According to the new provisions, one entity in a group of connected entities could enjoy the two-tier rates. For this purpose, an entity can be a natural person and business groups. When the said group will include multiple and different legal entities, a review of the holding structure will take place in order to determine that only one entity has selected the two-tier rate. Under the new system, the first 2 million HK$ of assessable profits would be taxed at two reduced rates, 8.25%, and 7.5%.

One of our agents who specialize in company registration in Hong Kong can give you further details on this matter along with information about the current taxation system in the city.

Contact us for more information and for complete services related to company incorporation.