Hong Kong profits tax rates explained for small firms
Hong Kong profits tax now has two rates, and the lower one is a real saving for small firms. From the year of assessment 2018/19, a company pays 8.25 percent on its first HK$2 million of assessable profits. Profits above that are taxed at 16.5 percent. This guide explains who pays, what the rates mean in dollars, and what to watch for.
The two rates in plain numbers
Before this change, a company paid one flat rate of 16.5 percent. Now the first slice of profit is taxed at half that rate. The new rates apply to any year of assessment that starts on or after 1 April 2018. That means the first tax year to use them runs from 1 April 2018 to 31 March 2019.
Here is how it looks for each type of business.
- Corporations: 8.25 percent on the first HK$2 million, then 16.5 percent on the rest.
- Partnerships and sole proprietors: 7.5 percent on the first HK$2 million, then 15 percent on the rest.
The government says the most a company can save in one year is HK$165,000. For an unincorporated business the most is HK$150,000.
Sources: Inland Revenue Department, Profits Tax page (ird.gov.hk/eng/tax/bus_pft.htm); Inland Revenue Department press release, 29 March 2018 (ird.gov.hk/eng/ppr/archives/18032902.htm).
A small company example
Take a company with HK$1.5 million of assessable profits. All of it falls inside the first HK$2 million. At 8.25 percent, the tax is HK$123,750. Under the old flat rate of 16.5 percent, the same profit would have meant HK$247,500.
Now take a company with HK$3 million of assessable profits. The first HK$2 million is taxed at 8.25 percent, which is HK$165,000. The last HK$1 million is taxed at 16.5 percent, which is HK$165,000. The total is HK$330,000. These are simple sums for illustration. Your own bill depends on the adjustments in your tax computation.
Who pays profits tax
Profits tax applies to people and bodies that carry on a trade, profession or business in Hong Kong. That includes companies, partnerships and trustees. The tax covers profits that arise in or come from Hong Kong. Profits from the sale of capital assets are left out.
Hong Kong taxes on a territorial basis. Where you live is not the test. The test is where the profits come from. A business based elsewhere can still owe tax on profits that come from Hong Kong. Profits from outside Hong Kong are not taxed here, even if the money is later sent to Hong Kong.
Source: Inland Revenue Department, Profits Tax page (ird.gov.hk/eng/tax/bus_pft.htm).
The connected entities rule
The lower rate is meant for small and medium firms. So the law lets only one business in a connected group use it each year. If two firms are connected, only one of them can be named for the lower rate.
Two entities are connected in these cases.
- One controls the other.
- Both are controlled by the same entity.
- One person runs two sole proprietorships.
Control generally means holding more than 50 percent of the shares, the votes, or the right to capital or profits. If you own several companies, think about which one should take the lower rate. A different company may be chosen in a later year.
Sources: Inland Revenue Department, two-tiered profits tax rates FAQ (ird.gov.hk/eng/faq/2tr.htm); Inland Revenue Department press release, 29 March 2018 (ird.gov.hk/eng/ppr/archives/18032902.htm).
How to claim the lower rate
You do not file a separate form. The business that wants the lower rate says so in its tax return for that year. Companies and partnerships use the Profits Tax Return. Sole proprietors use the Tax Return for individuals. The claim only works if no other connected entity claims it for the same year. Once you make the claim, you cannot take it back for that year.
If your business has no connected entities, you state that in the return. You can simply say that you are chargeable at the two-tiered rates.
Source: Inland Revenue Department, two-tiered profits tax rates FAQ (ird.gov.hk/eng/faq/2tr.htm).
What to do now
Check whether your company is part of a group with common owners. List every company or sole proprietorship you control. Decide which one should claim the lower rate. Keep your accounts tidy, because the tax is charged on assessable profits worked out from them.
Remember that provisional tax is charged for each year of assessment. When your final assessment arrives, the provisional tax you paid is set against it. For questions on your own case, you can contact the Inland Revenue Department. This is general information, not tax advice. Speak to a qualified tax adviser about your own situation.
Source: Inland Revenue Department, Profits Tax page (ird.gov.hk/eng/tax/bus_pft.htm).
Sources
- ird.gov.hk/eng/tax/bus_pft.htm
- ird.gov.hk/eng/faq/2tr.htm
- ird.gov.hk/eng/ppr/archives/18032902.htm