Hong Kong's Two-tier Profits Tax System

JUNE 25, 2023

Doing business in Hong Kong comes with many advantages, one of which is its relaxed and competitive tax regime. This article briefly discusses the special two-tier tax regime in Hong Kong and how it affects businesses operating there.

The corporate tax structure in Hong Kong is divided into two levels, or a "two-tier" system. First, for the portion of annual profits not exceeding HKD 2 million, businesses are required to pay tax at a rate of 8.25%. For the part of annual profits exceeding HKD 2 million, they need to pay tax at a rate of 16.5%.

This two-tier tax regime applies to all forms of businesses, whether they are companies or non-corporate business entities. This tax structure aims to encourage business growth and innovation, while providing lower tax rates for startups and small-to-medium enterprises (SMEs) to facilitate their development.

However, this tax regime is not without limitations. The law's definition of "connected entities" is quite broad, ensuring that associated taxpayers can only get half-priced tax benefits from one entity. Therefore, the group needs to determine which entity will receive the benefits and make the choice accordingly. It's important to note that once a choice has been made, it cannot be revoked within that assessment year.