What is the two-tiered profits tax rates regime?

Corporate tax returns

Two-Tiered Profits Tax Regime

The Hong Kong Government has set up preferential policies to encourage enterprises to develop and reduce the tax burden on SMEs. This system, which came into effect in the year of assessment 2018/19, helps enterprises reduce expenses and promote economic growth by reducing the tax rate on the first part of their chargeable profits.

The tax rate of the two-tiered profits tax system

According to the Inland Revenue Ordinance (Cap. 112), Hong Kong adopts a two-tiered corporate profits tax rate, which is divided into two types: limited company (corporation) and sole proprietorship/partnership (unincorporated corporation).

  • Limited Company (Corporation):
    • The first HK$2 million of chargeable profits will be taxed at a rate of 8.25%.
    • A 16.5% tax rate applies to the amount exceeding HK$2 million
  • Sole proprietorship or partnership (unincorporated association):
    • A 7.5% rate will apply to the first HK$2 million of chargeable profits
    • A 15% tax rate will apply to the amount exceeding HK$2 million

An example of the two-tiered profits tax rates regime

Assuming that the annual chargeable profits of a limited company are HK$3 million, the calculation is as follows:

  1. The first HK$2,000,000 is calculated at 8.25%:
    • 2,000,000×8.25% = HK$165,000
  2. The remaining HK$1,000,000 is calculated at 16.5%:
    • 1,000,000×16.5% = HK$165,000
  3. Total tax = 165,000 + 165,000 = HKD 330,000

If there is no two-tier system, and all profits are calculated at 16.5%, the tax will be as follows:

  • 3,000,000×16.5% = HK$495,000

Through the two-tier system, the company can save HK$165,000 in tax.

Conditions and restrictions apply

Enterprises that can enjoy the two-tier system:

  • Enterprises operating in Hong Kong with chargeable profits, including limited companies, sole proprietorships or partnerships.

Not applicable in the following cases:

  1. Affiliate Restrictions:
    • Only one company within the same corporate group can enjoy a lower tax rate (8.25% or 7.5%).
    • If a group has more than one company, the IRD will require one of the companies to be designated to enjoy the concession, while the standard tax rate will apply to the remaining companies.
  2. Certain industries or incomes may not be applicable:
    • Some companies engaged in specific industries such as finance and insurance may be subject to other tax regulations and are not subject to the two-tier system.

The Inland Revenue Department (IRD) has a two-tiered profits tax rates system https://www.ird.gov.hk/chi/faq/2tr.htm

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