What is the profits tax rate in Hong Kong?

## Hong Kong Profits Tax Rate

Hong Kong's Profits Tax uses a two-tier regime introduced on 1 April 2018. The rates for corporations are:

• **8.25%** on the first HKD 2 million of assessable profits
• **16.5%** on assessable profits above HKD 2 million

For unincorporated businesses (sole traders and partnerships) the rates are 7.5% and 15% respectively.

## How the Two-Tier Regime Works

Example calculation:

A Hong Kong private limited company earns HKD 6 million in assessable profits:

• First HKD 2,000,000 x 8.25% = HKD 165,000
• Remaining HKD 4,000,000 x 16.5% = HKD 660,000
• Total Profits Tax = **HKD 825,000** (effective rate: 13.75%)

## The One-Entity Rule

The 8.25% lower rate is available to only one entity within a group of connected companies. Two or more companies are 'connected' if one controls the other or if both are under common control.

If a group has multiple HK companies, the group must nominate which entity claims the lower rate. If no nomination is made, the IRD will not apply the lower rate to any entity. Planning which entity benefits is part of group tax structuring.

## What Counts as Assessable Profits

Assessable profits are not the same as accounting profit. The BIR52 Profits Tax Return requires a tax computation that:

• Starts with accounting profit per the audited accounts
• Adds back disallowed expenses (entertainment under S.17(1)(f), capital expenditure, domestic expenses)
• Deducts additional tax allowances (100% initial allowance on plant and machinery, R&D enhanced deductions)
• Applies any prior year tax losses carried forward

Common adjustments:

• Entertainment expenses: always added back
• Depreciation charged in accounts: added back, replaced by IRD depreciation allowances
• Capital expenditure expensed: added back (treated as capital unless initial allowance claimed)
• Initial allowances on plant: deducted as a replacement for accounting depreciation

## Territorial Basis of Tax

Establishing that profits are offshore requires contemporaneous documentation: where contracts were negotiated and concluded, where staff performing the work were based, where management decisions were made.

## Comparison with Other Jurisdictions

| Jurisdiction | Standard Corporate Rate | |---|---| | Hong Kong (effective from HKD 2M+) | 16.5% | | Singapore | 17% | | UK | 25% | | Australia | 25%-30% | | United States | 21% federal + state | | Germany | ~30% |

Hong Kong's headline 16.5% is competitive globally. Combined with the territorial tax basis, no VAT, no capital gains tax, and no withholding tax on dividends, the total tax burden on a Hong Kong company is among the lowest of any developed financial centre.

## Provisional Tax

HK Profits Tax is paid in two stages. When an assessment issues, the IRD simultaneously raises a provisional tax for the following year, estimated at 100% of the current year's assessable profits. Approximately 75% of the provisional tax is payable with the main tax demand. This means in the first profitable year, a company pays both the current year's actual tax and 75% of an estimate for the coming year.

## Who Must File

Every company carrying on a business in Hong Kong must file a Profits Tax Return (BIR52) each year, even if the company made a loss or is claiming full offshore exemption. Loss returns must still be filed to preserve the carry-forward.