Hong Kong taxes the first HK$2 million of a corporation's assessable profits at 8.25%, and the remainder at 16.5%. For unincorporated businesses the rates are 7.5% and 15%. The lower rate is not available to every company in a group: only one entity among connected entities can elect to use it.
The election is made in the Profits Tax Return. Tax on profits up to HK$2 million is therefore at most HK$165,000.
At a glance
- Corporations
- 8.25% on the first HK$2 million; 16.5% above
- Unincorporated businesses
- 7.5% on the first HK$2 million; 15% above
- Maximum saving
- HK$165,000 a year for a corporation
- Connected entities
- Only one can claim the lower tier
How the calculation works
| Assessable profits (HK$) | Tax at two-tiered rates (HK$) | Tax at 16.5% (HK$) | Saving (HK$) |
|---|---|---|---|
| 1,000,000 | 82,500 | 165,000 | 82,500 |
| 2,000,000 | 165,000 | 330,000 | 165,000 |
| 5,000,000 | 165,000 + 495,000 = 660,000 | 825,000 | 165,000 |
The calculation is shown before any tax reductions announced in the annual Budget.
Connected entities
- Entities are connected if one controls the other, both are controlled by the same entity, or (for individuals) they are under common control in certain ways.
- Control generally means holding more than 50% of the issued share capital, voting rights or rights to profits, directly or indirectly.
- Among connected entities, only one, nominated by the group, can use the two-tiered rates for a year of assessment.
- Splitting one business across several companies to multiply the lower tier does not work.
Making the election
The election and nomination are made in the Profits Tax Return, which asks whether the company has connected entities. Answer accurately: incorrect claims can be reassessed with penalties.
Worked example: two connected companies
| Company A | Company B | |
|---|---|---|
| Assessable profits | HK$1,500,000 | HK$3,000,000 |
| If A nominated | HK$123,750 (8.25%) | HK$495,000 (16.5%) |
| If B nominated | HK$247,500 (16.5%) | HK$165,000 + HK$165,000 = HK$330,000 |
Nominating A gives total tax of HK$618,750; nominating B gives HK$577,500. The best choice depends on the figures each year, and the saving is capped at HK$165,000 for the nominated entity.
Self-check: where do you stand?
| Question | What to do |
|---|---|
| Do you or your companies control other Hong Kong entities? | List all connected entities |
| Has the group chosen which entity claims the lower tier? | Nominate the most suitable entity each year |
| Is the connected-entity question answered correctly in returns? | Review before filing |
| Are you planning to split a business across companies? | Take advice; it will not multiply the lower tier |
- Identifying connected entities across your companies.
- Recommending which entity should claim the lower tier.
- Preparing Profits Tax Returns with the correct election.
In summary
- 8.25% on the first HK$2 million, 16.5% above.
- One entity per connected group.
- Review the election each year.
Official references
- Inland Revenue Ordinance (Cap. 112), section 14 and Schedule 8
- Inland Revenue Department: FAQ on the two-tiered profits tax rates regime, www.ird.gov.hk