Two-tiered profits tax rates regime to be implemented from April 1 this year. It will be applicable to any year of assessment commencing on or after April 1, 2018.Where applicable, the eligible taxpaying entity will be chargeable to 2018/19 Provisional Profits Tax at the two-tiered profits tax rates.
It is the Government's objective to adopt a competitive taxation system to promote economic development while maintaining a simple and low tax regime. The two-tiered profits tax rates regime will reduce the tax burden on enterprises, especially SMEs and startup enterprises. This will help foster a favourable business environment, drive economic growth, create job opportunities and enhance Hong Kong's competitiveness. On the assumption that 20 per cent of the tax-paying enterprises are connected enterprises, the tax revenue forgone arising from the implementation of the two-tiered regime will be about $5.8 billion per year, or around 4 per cent of the total profits tax received in 2016-17.
Under the two-tiered profits tax rates regime, the profits tax rate for the first $2 million of profits of corporations will be lowered to 8.25 per cent. Profits above that amount will continue to be subject to the tax rate of 16.5 per cent. For unincorporated businesses (i.e. partnerships and sole proprietorships), the two-tiered tax rates will correspondingly be set at 7.5 per cent and 15 per cent. A tax-paying corporation or unincorporated business may save up to $165,000 and $150,000 each year respectively.
The two-tiered profits tax rates regime will benefit eligible enterprises with assessable profits, irrespective of their size. To ensure that the tax benefits will target small and medium enterprises (SMEs), the application of the two-tiered rates is restricted to only one enterprise nominated among connected entities. The Ordinance has prescribed a simple, clear and objective definition for connected entities.
What is an entity?
An entity means –
(a) a natural person;
(b) a body of persons; or
(c) a legal arrangement, including –
(i) a corporation;
(ii) a partnership; and
(iii) a trust.
If a natural person carries on more than one sole proprietorship business, the person is taken to be a separate entity in relation to each sole proprietorship business.
How is "connected entity" defined?
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.
How is "control" determined?
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.
It should be noted that if, at the end of the basis period of the entity for the relevant year of assessment, the entity has one or more connected entities, the two-tiered profits tax rates would only apply to the onewhich is nominated to be chargeable at the two-tiered rates. The others would not qualify for the two-tiered profits tax rates. See Q8 below. Further, if a corporation has made an election under section 14B(2)(a) (qualifying professional reinsurance business and authorized captive insurance business), section 14D(5)(b) (qualifying corporate treasury centre), section 14H(4)(b) (qualifying aircraft lessor) or section 14J(5)(b) (qualifying aircraft leasing manager), the corporation would not qualify for the two-tiered rates.
The taxpaying entity 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.Heavy penalties may be imposed for making an incorrect return without a reasonable excuse. Additional assessments will be raised in accordance with the provisions of the IRO on the taxpaying entity on the basis that the two-tiered profits tax rates do not apply.
If an individual taxpayer elects for Personal Assessment, the tax will be calculated at progressive tax rates on the aggregated income from all sources, including the profits derived from his or her unincorporated businesses. Thus, the tax calculated under Personal Assessment may be higher than that calculated under the schedular basis where the individual taxpayer can nominate one of his or her businesses for electing the two-tiered profits tax rates.
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