Two-tiered Profits Tax Rates Regime in Hong Kong
A two-tiered profits tax rates regime was proposed by the Hong Kong Government during the last quarter of 2017 and the relevant Inland Revenue (Amendment) (No.7) Bill 2017 (the "Bill") was gazetted and introduced to the Legislative Council early this year. Subject to the enactment of the legislation, the two-tiered tax rates will apply starting from the year of assessment 2018/19 (i.e. 1 April 2018 to 31 March 2019). The salient features of the new tax regime are as follows:
- Under the proposed two-tiered system, the first HK$2 million of assessable profits for corporations and unincorporated businesses will be taxed at half of the current tax rate, i.e. 8.25% and 7.5% respectively. The remaining assessable profits will be taxed at the current full tax rates of 16.5% and 15% for corporations and unincorporated businesses respectively. The proposed Bill is constructed in a way that the two-tiered profits tax rates regime will apply to all relevant entities by default, except connected entities as discussed in the next bullet point.
- To avoid corporate group splitting incomes among its connected entities in order to enjoy the lower tax rate, restrictions are introduced which limit the application of the two-tiered tax rates to only one entity nominated by the group of "connected" entities. Two entities are generally regarded as connected entities if one of them has control over the other or both of them are under control of the same entity. “Control” generally refers to holding directly or indirectly more than 50% of issued share capital, voting rights, capital or profits in another entity. The "connected" relationship is determined by their status at the end of the basis period.
- Certain entities may have already enjoyed half tax rate under the relevant preferential tax regimes, such as corporate treasury centre, reinsurance business, captive insurance business, aircraft leasing business and aircraft leasing management business. Under the proposed Bill, entities elected for these preferential half-rate tax regimes will be excluded from the two-tiered profits tax system. Once an entity has made an election for either of these preferential tax regimes so that its qualifying assessable profits are subject to the half tax rate, the remaining non-qualifying profits will be subject to the full tax rate.
- The proposed Bill provides a new ground for holdover of the 2018/19 provisional profits tax in addition to the holdover grounds under the existing rules. In particular, an application for holding over the payment of 2018/19 provisional profits could be made based on the ground that the entity is likely to be chargeable under the two-tiered profits tax regime. The holdover application has to be made in writing to the Commissioner of Inland Revenue within the prescribed time limit.