Two-tiered profits tax rates regime: effective from April 1 2018 1
The Inland Revenue (Amendment) (No. 3) Ordinance 2018 (the Ordinance) was gazetted on March 29 to implement the two-tiered profits tax rates regime announced in the 2017 Policy Address.
The two-tiered profits tax rates regime is applicable to any year of assessment commencing on or after April 1, 2018. The profits tax rate for the first $2 million of profits of corporations will be lowered to 8.25 per cent. Profits above that amount will continue to be subject to the tax rate of 16.5 per cent. For unincorporated businesses (i.e. partnerships and sole proprietorships), the two-tiered tax rates will correspondingly be set at 7.5 per cent and 15 per cent. A tax-paying corporation or unincorporated business may save up to $165,000 and $150,000 each year respectively.
The two-tiered profits tax rates regime will benefit eligible enterprises with assessable profits, irrespective of their size. To ensure that the tax benefits will target small and medium enterprises (SMEs), the application of the two-tiered rates is restricted to only one enterprise nominated among connected entities. The Ordinance has prescribed a simple, clear and objective definition for connected entities.
“It is the Government’s objective to adopt a competitive taxation system to promote economic development while maintaining a simple and low tax regime. The two-tiered profits tax rates regime will reduce the tax burden on enterprises, especially SMEs and startup enterprises. This will help foster a favourable business environment, drive economic growth, create job opportunities and enhance Hong Kong’s competitiveness. On the assumption that 20 per cent of the tax-paying enterprises are connected enterprises, the tax revenue forgone arising from the implementation of the two-tiered regime will be about $5.8 billion per year, or around 4 per cent of the total profits tax received in 2016-17,” a government spokesman said.