General
Two-tiered profits tax rates has introduced for corporations and unincorporated businesses with effect from the year of assessment 2018/19.
Under the two-tiered profits tax rates regime, the profits tax rate for the first HK$2 million of assessable profits will be lowered to 8.25% for corporations and 7.5% for unincorporated businesses (mostly partnerships and sole proprietorships).
Assessable profits above HK$2 million will continue to be subject to the rate of 16.5% for corporations and standard rate of 15% for unincorporated businesses.
All entities with profits chargeable to Profits Tax in Hong Kong would qualify for the two-tiered profits tax rates, except those with a connected entity which is nominated to be chargeable at the two-tiered rates. For two or more connected entities, only one of them may elect the two-tiered profits tax rates.
Connected Entity
Definition
• An entity is a connected entity of another entity if –
a) one of them has control over the other;
b) both of them are under the control of the same entity; or
c) in the case of the first entity being a natural person carrying on a sole proprietorship business – the other entity is the same person carrying on another sole proprietorship business.
Control
• Generally, an entity has control over another entity if the first-mentioned entity, whether directly or indirectly through one or more than one other entity,
a) owns or controls more than 50% in aggregate of the issued share capital of the latter entity;
b) is entitled to exercise or control the exercise of more than 50% in aggregate of the voting rights in the latter entity; or c) is entitled to more than 50% in aggregate of the capital or profits of the latter entity.
Election
No connected entity
• The taxpayer has to declare that it has no connected entity at the end of the basis period for the relevant year of assessment. For administrative convenience, the taxpaying entity can simply declare in its tax return that it is chargeable at the two-tiered profits tax rates.
With connected entities
The nominated entity may make the election by declaring in its Profits Tax Return (for corporations and partnerships) or Tax Return – Individuals (for sole proprietorships) that it is chargeable at the two-tiered profits tax rates for the relevant year of assessment whereby no other connected entity elects to be so chargeable.
Once the election is made, it is irrevocable for that year.
However, a different connected entity may elect the two-tiered profits tax rates for a different year of assessment if all conditions are met.
Other Issues
No election
• If no election for the two-tiered profits tax rates has been made, the whole assessable profits will be chargeable to Profits Tax at the rate of 16.5% or 15%, as applicable.
Two or more sole proprietorship businesses owned by the same sole proprietor
• If a natural person owns two or more sole proprietorship businesses, the person is taken to be a separate entity in relation to each sole proprietorship business. The application of the two-tiered profits tax rates will be restricted to only one of the sole proprietorship businesses which has made an election.
Incorrect declaration
• Heavy penalties may be imposed for making an incorrect return without a reasonable excuse. Additional assessments will be raised on the taxpayer on the basis that the two-tiered profits tax rates do not apply.
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