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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.

Dividends derived from China by a foreign investor are currently subject to China Enterprise Income Tax in the form of Withholding Tax at 10%. In order to attract foreign capital flow into China, a preferential tax deferral policy has recently been implemented by the Chinese government. Under this policy, if foreign investors directly reinvest their profits distributed by Chinese resident enterprises in the encouraged industries and meet certain criteria, then the 10% Withholding Tax on the distributed profits (i.e. dividends) shall not be levied, until the foreign investors dispose of such reinvestments in China. The preferential tax deferral policy took retroactive effect from 1 January 2017. That is, dividends received by foreign investors on or after 1 January 2017 may be eligible for the tax deferral treatment and a refund for the Withholding Tax already paid could be applied.

Passive incomes such as dividends, interests, royalties, capital gains derived from China by a non-Chinese tax resident enterprise (“NRE”) are generally subject to China enterprise income tax in the form of withholding tax. Effective from 1 December 2017, the following changes should be noted:

Since early this year, the Chinese government has released various circulars to promote and attract foreign investments. The key policies refer to further relaxation of the access restriction on foreign capital, formulation of fiscal and taxation incentives, improvement of the investment environment for state level economic development zones, facilitation of talent entrance and exit, as well as optimizing business environment. The major features are as follows: