The rates
Since the year of assessment 2018/19, Hong Kong has charged Profits Tax at two rates. The first HK$2 million of assessable profits is taxed at half the standard rate, and the remainder at the standard rate.
| Taxpayer | First HK$2,000,000 | Remainder |
|---|---|---|
| Corporations | 8.25% | 16.5% |
| Unincorporated businesses (partnerships and sole proprietorships) | 7.5% | 15% |
How much a company can save
Take a company with assessable profits of HK$2,500,000 and no connected entities:
| Calculation | Tax (HK$) |
|---|---|
| First HK$2,000,000 at 8.25% | 165,000 |
| Remaining HK$500,000 at 16.5% | 82,500 |
| Tax under the two-tiered rates | 247,500 |
| Tax if all profits were taxed at 16.5% | 412,500 |
| Saving | 165,000 |
HK$165,000 is the most a corporation can save in a year. A company with profits below HK$2 million pays 8.25% on all of them. For an unincorporated business the maximum saving is HK$150,000.
The connected-entities rule
This is where groups need care. If a business has connected entities, the lower rates do not apply automatically. Only one entity in the connected group may elect for them in each year of assessment.
Entities are generally connected if one controls the other, both are controlled by the same person, or they are sole proprietorships owned by the same individual. Control usually means holding, directly or indirectly, more than 50% of the issued share capital, voting rights, or capital or profits.
Three companies controlled by the same owner get the lower rate once a year, not three times.
Making the election
- A business with no connected entity declares this in its Profits Tax return, and the two-tiered rates then apply.
- In a connected group, the nominated entity elects in its own return. No other connected entity may elect for the same year.
- The election cannot be changed once made for a year, but a different entity can be nominated in a later year.
- The IRD can impose heavy penalties for an incorrect declaration without reasonable excuse.
Choosing which company to nominate
The full benefit is only available on HK$2 million of profit. Nominating a company that makes a loss, or only a small profit, wastes most of it. It usually makes sense to nominate the company expected to have assessable profits of at least HK$2 million, and to agree the nomination across the group before the first return is filed.
Some corporations cannot use the two-tiered rates at all: those that elect for certain concessionary rates, such as for insurance business, qualifying corporate treasury centres, and aircraft or ship leasing.
Sole proprietors and personal assessment
For sole proprietors, the two-tiered rates can change whether personal assessment is worth electing. The lower business rate sometimes makes the separate, schedular basis cheaper, so it is worth comparing both each year.
The 2025/26 one-off reduction
For the year of assessment 2025/26, final Profits Tax is reduced by 100%, up to HK$3,000 per case. The reduction is applied to the tax after the two-tiered rates.
How we help
When we prepare your Profits Tax return, we check your group structure for connected entities, recommend which company to nominate, and make the declaration in the return. If you are not sure whether your companies are connected, send us your group chart and we will take a look.
This article is general information and is not advice for your circumstances.