Hong Kong is a business-friendly place with low tax rates and a simple tax system. One of the pillars of this is the Two-Tier Profits Tax System which is designed to help businesses grow especially small and medium enterprises (SMEs). In this article, we will dive into the details of Hong Kong’s tax landscape, the benefits of the Two-Tier Profits Tax System and key considerations for businesses operating in this place.
Content Outline
Key Takeaways
Business-Friendly Tax Environment
Hong Kong’s territorial tax system allows businesses to be taxed only on profits derived from activities conducted within the region, with flat corporate rates of 16.5% for corporations and 15% for unincorporated entities.
Two-Tier Profits Tax System
Designed to benefit small and medium enterprises (SMEs), this system offers reduced tax rates on the first HKD 2 million of assessable profits, making it easier for these businesses to thrive.
Eligibility Criteria
To qualify for the two-tier rates, businesses must be incorporated in Hong Kong and not be part of a “connected group.”
Additional Tax Considerations
Beyond hk profit tax rate, businesses need to be aware of other tax obligations such as salaries tax, withholding tax, and compliance with accounting standards.
Innovative Tax Incentives
Hong Kong offers various tax regimes, including concessionary rates for certain industries and a patent box regime to stimulate innovation.
Unveiling the HK Profit Tax Rate Landscape
Territorial System and Flat Rates
Hong Kong is a territorial-based taxation which means only profits derived from activities carried out in Hong Kong are subject to profits tax. This allows businesses to enjoy a flat corporate profits tax rate of 16.5% for corporations and 15% for unincorporated businesses. This simplicity makes it easier for businesses to plan their financials.
Foreign-Sourced Income Exemption
Besides the territorial system, Hong Kong also has a foreign-sourced income exemption which allows businesses to exclude profits earned outside Hong Kong from local taxation. This is very useful for businesses involved in international trade or those with a diversified portfolio across multiple jurisdictions.
Hong Kong’s Two-Tier Profits Tax
The Two-Tier Profits Tax System is a significant development for SMEs. Under this system, qualifying businesses are taxed at a lower rate on the first HKD 2 million of their assessable profits, so there’s an incentive to grow and be sustainable.
A Boon for Small and Medium Enterprises (SMEs)
SMEs are the lifeblood of Hong Kong’s economy and the Two-Tier Profits Tax System addresses their problems by reducing the tax burden. By allowing smaller businesses to enjoy lower tax rates, the government encourages entrepreneurship, innovation and job creation and a more dynamic economy.
Who Qualifies for Two-Tier Rates?
Every corporation, partnership, and sole proprietorship, except those already exempt from tax, qualifies for the Two Tier Tax Rates Regime. In this case, businesses whether they are large or small in any of the industries that are eligible can enjoy the tax relief that the system provides.
But to benefit from the lower profits tax, businesses must meet certain requirements. For instance, the total gross income of the business must not be above HK$500 million. So the tax relief is limited to SMEs is as they are generally considered to be businesses with a lower turnover.
Businesses also need to meet certain conditions related to their business activities:
- They can’t perform any activities that are not regarded in accordance with Hong Kong law as “trade, profession, or business”.
- They can’t engage in any remunerated activities outside of Hong Kong. However, there’s always exceptions.
Breakdown of Tax Rates
Under the Two-Tier Profits Tax System, the rates are as follows:
- First HKD 2 million of assessable profits: 8.25% for corporations and 7.5% for unincorporated businesses.
- Profits above HKD 2 million: 16.5% for corporations and 15% for unincorporated businesses.
This tiered structure reduces the effective tax rate for smaller businesses and allows larger corporations to operate smoothly.
Key Considerations When Applying Two-Tier Rates
Connected Entities and Eligibility
In Hong Kong, business entities may cooperate in alternative ways such as partnerships or joint ventures. These networks are beneficial in that they give you access to a wealth of know-how and an extended business reach. However, there are tax hurdles as well.
Under the Regime of the Two-Tiered Tax Rates, entities are connected, and they share the same limit on the rate of tax reduction. That means, if they are linked to each other, all of them are taxed as a single entity. This ensures that the tax system will remain fair and no loophole will be exploited.
For example, if two businesses are in a joint venture, they’re considered one in tax issues. They will be eligible for a profit share of HK $4 million and to be taxed at 8.25%. However, if profit goes beyond $4m, the 16.5 % is payable on the excess amount.
Consequently, take into account these rules when you are thinking about teamwork with other businesses. This will help you keep the business compliant, avoid any fines, and cruise through it.
Understanding Basis Period and Filing Deadlines
Understanding the basis period (the period for which profits are assessed) is crucial. The profits tax return is typically due one month after the profits tax basis period ends. The filing deadlines for profits tax returns are important as companies must file on time to avoid penalties.
The Main Rules of the Regime
The Two Tier Tax System is a web of regulations that governs how companies are charged for their use of resources in Hong Kong. If you want to stay compliant and avoid stacking up a wad of penalties, make sure you understand the rules of the regime. Like many places, Hong Kong is big on its tax evasion penalties.
One of the key rules of the Two Tier Tax System concerns companies that are jointly charged — when multiple people have teamed up to open a company. That means they’re all in it together when it comes to paying taxes, so no one can opt-out or cherry-pick what they pay. So make sure every member of the venture shares the responsibility for the tax you’re liable to pay.
Imagine you’re operating from out of Hong Kong, but you’re based in Hong Kong, you can still make use of the Two-Tier System, as long as you meet certain requirements. Free-riding is like a business that uses the roads and resources of a country but doesn’t pay anything for the maintenance costs — it seems unfair. Thus, the aim of the Two-Tier System is not to punish companies based on their operations but to ensure that companies engaged in business in Hong Kong pay their fair share for the resources they use, no matter where they operate.
The Two-Tier System in Hong Kong comprises power, gas, water, and waste management resources. Therefore, companies have to monitor closely how much data they use to avoid unpleasant surprises.
Indeed, it may appear difficult but the Two-Tier System is essential for firms in Hong Kong to be compliant with. The ability to understand and follow the rules, together with the regular checks on resource usage, will allow companies to be both eco-friendly and responsible businesses that pay their way.
Can More Entities Use Two-Tiered Profit Tax Rates?
Absolutely. Entrepreneurs can take advantage of the Two-Tiered Tax Rates Regime, provided that their businesses comply with the inland revenue authority’s requirements. This measure of tax relief was created to promote the growth and competitiveness of the small and medium-size enterprises in Hong Kong which will help more firms to benefit, and thus, strengthen the country’s financial stability.
Beyond Two-Tier Rates: Other Hong Kong Taxes
The Two-Tier Profits Tax System is great but businesses should also be aware of other taxes in Hong Kong.
Salaries Tax
Salaries tax is imposed on income earned in Hong Kong by employees with a progressive rate structure that tops at 17%. Companies should consider this tax when determining employee remuneration.
Withholding Tax and Its Implications
Hong Kong generally imposes a withholding tax on certain payments made to non-residents, such as dividends, interest, and royalties. However, this withholding tax can often be reduced or eliminated through double taxation agreements (DTAs).
Double Taxation Agreements: Avoiding Duplication
Hong Kong has DTAs with many jurisdictions to avoid double taxation on income from overseas sources. Knowing these agreements can help minimize tax.
Maintaining Compliance with Accounting Standards
Businesses must follow local accounting standards and keep their financials transparent and accurate. This is important to maintain a good relationship with IRD.
Special Tax Regimes for Specific Industries and Activities
Hong Kong offers concessionary tax rates for certain industries and activities, further promoting specific sectors. Some notable examples include:
Concessionary Tax Rates – Tailored Benefits
The shipping and airfreight industries qualify for a concessionary profits tax rate of 8.25%.
Patent Box Regime: Boosting Innovation
This regime offers a lower tax rate on profits derived from qualifying intellectual property (IP).
Family-Owned Investment Holding Vehicles: Structuring for Success
Properly structured family-owned investment holding vehicles can benefit from tax advantages on dividends and capital gains.
Tax Rates for Different Years of Assessment
Understanding tax rates for different years of assessment is essential for effective financial planning. Tax rates for different years may change with government policies and economic conditions.
Table: Tax Rates for Corporations and Unincorporated Businesses (Different Years of Assessment)
| Year of Assessment | Corporations | Unincorporated Businesses |
| 2020/2021 | 16.5% | 15% |
| 2021/2022 | 16.5% | 15% |
| 2022/2023 | 16.5% | 15% |
Conclusion
Hong Kong’s Two-Tier Profits Tax System is a big plus for businesses especially SMEs by providing a framework for lower tax burden and growth. Understanding the intricacies of this tax system and its implications is key to businesses navigating the Hong Kong tax landscape successfully.
In a nutshell, businesses in Hong Kong can use the Two-Tier Profits Tax System, have foreign-sourced income exemptions and enjoy various tax regimes to support innovation and investment. By knowing these tax benefits and complying with local regulations, companies can perform better financially.
How FastLane Group Can Help
If you are lost in the maze of Hong Kong’s Two Tier Tax Rates System, then read on. People should not let tax complexity to be the cause of their business growth slowing down. FastLane Group is the leading provider of accounting services in Hong Kong, and we can simplify the tax rates system for you. The team of CPAs and tax specialists at our company is highly experienced in the local regulations and requirements and this way we guarantee that all your tax matters are resolved quickly and in compliance with the law. When you hire us, you can concentrate on what you do best – which is to run and grow your business. Leave us to take care of tax compliance and management while you can steer your business with confidence knowing that tax matters are taken care of. Contact us now.
