Hong Kong’s New Two-tiered Profits Tax
By Paul Dwyer, Director, Head of International Tax and Transfer Pricing
On December 29, 2017, the Inland Revenue (Amendment) (No. 7) Bill 2017 (Profits Tax Bill) was gazetted in Hong Kong, thereby introducing a two-tiered profits tax rate regime to the city.
The key objectives of the Profits Tax Bill are to maintain a competitive taxation system to promote economic development, while maintaining a simple and low tax regime.
The introduction of the two-tiered profits tax regime will reduce the overall tax burden on enterprises, especially for small and medium enterprises, and boost Hong Kong’s status as a preferred investment jurisdiction in Asia.
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Overview of the Profits Tax Bill
The Profits Tax Bill introduces a two-tiered profits tax regime to Hong Kong, which will apply to both corporations and unincorporated businesses commencing from the year of assessment 2018/19 (i.e., on or after April 1, 2018).
Before the Profits Tax Bill, profits earned by a corporation were taxed at a standard rate of 16.5 percent, while profits earned by unincorporated businesses were taxed at a standard rate of 15 percent.
With the introduction of the Profits Tax Bill, the first HK$2 million (US$256,000) of profits earned by a corporation will be taxed at 8.25 percent – half the current tax rate. The remaining profits will continue to be taxed at the existing 16.5 percent tax rate.
For unincorporated businesses, the first HK$2 million of profits earned will be taxed at 7.5 percent – also half the current tax rate. The remaining profits thereafter will be taxed at the existing 15 percent tax rate.
In order to avoid double benefits, enterprises that already benefit from preferential tax regimes such as the corporate treasury center regime, aircraft leasing regime, etc. shall be excluded from the two-tiered profits tax regime.
Additionally, the assessable profits for sums received by or accrued to holders of qualifying debt instruments as interest, gains, or profits shall be excluded, as these should already be taxed at half the rate (8.25 percent or 7.5 percent, as the case may be).
There will be a specific measure to prevent corporate activities from being divided amongst a large number of group companies who could benefit from the lower tax rate. Each corporate group will need to select one group company to benefit from the preferential profits tax rate.
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A competitive tax environment
According to the Hong Kong government, the two-tiered profits tax system will save corporations up to HK$165,000 per year (US$21,100), and unincorporated business up to HK$150,000 (US$19,180) per year. Given the current commercial and practical difficulties of doing business in Hong Kong, such as opening a corporate bank account, and in light of alternative low-tax jurisdictions like Singapore, the proposed two-tiered profits tax system is a much-needed step to ensure that Hong Kong remains an attractive and competitive investment destination.
From 2006 to 2017, the average corporate tax rate in Asia fell from 29 percent to 21 percent, thereby reducing Hong Kong’s comparative tax advantages. Meanwhile, economic development and liberalizations in mainland China and the rise of ASEAN as an investment destination have also affected Hong Kong’s relative strengths.
The Profits Tax Bill, together with other recently finalized measures such as the ASEAN-Hong Kong Free Trade Agreement and Hong Kong-India Double Tax Avoidance Agreement, reinforce Hong Kong’s reputation as a competitive tax environment and management hub, and should offer a jolt to the city’s economy.
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