hong kong tax alert - de.ey.com filebusiness in hong kong in the year of assessment 2018/19, will be...
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23 March 2018
2018 Issue No. 6
Hong Kong Tax Alert
On 21 March 2018, the Inland Revenue (Amendment) (No. 7) Bill 2017 (the Bill), which seeks to implement the two-tiered profits tax rates regime announced by the Chief Executive in her maiden 2017 Policy Address, passed its third reading in the Legislative Council.
The Bill as passed is expected to be gazetted and formally become law (the new law) of Hong Kong next Thursday.
Clients who wish to explore how they can benefit from the new law can contact their tax executives.
Hong Kong passes legislation for a two-tier profits tax rates regime
2Hong Kong Tax Alert
Outline of the two-tiered profits tax rates regime
The new law introduces a two-tiered profits tax rates regime, commencing from the year of assessment 2018/19, as follows:
Income from QDIs not counted towards the first HK$2 million threshold
The new law has clarified that profits derived from qualifying debt instruments (QDIs), which are already taxed at half the standard or corporate tax rate (“the half-rate”) under section 14A of the Inland Revenue Ordinance (IRO), will not be counted towards the first HK$2 million threshold under the two-tiered regime.
For example, a corporation having HK$3 million assessable profits derived from half-rate QDIs, as well as HK$1 million assessable profits derived from operating a business in Hong Kong in the year of assessment 2018/19, will be subject to the half-rate tax on its HK$3 million assessable profits from QDIs pursuant to section 14A of the IRO. The assessable profits of HK$1 million from operating the business will be considered as falling within the first HK$2 million threshold under the two-tiered regime and be eligible to be taxed at the lower rate of 8.25%; the assessable profits from QDIs not counting towards the threshold.
Business restructurings to take advantage of the two-tiered regime generally permissible
The government has indicated that business restructurings, including amalgamation of companies, involving a transfer of business from one company to another are generally considered as a normal commercial activities. As such, any increased tax benefits under the two-tiered regime as a result of such restructurings will not generally be considered as a tax avoidance arrangement falling foul of the new law.
Commentary
We welcome the passing of the new law together with the above clarifications. The new law will reduce the tax burden on enterprises, especially SMEs and startups, thus fostering a favorable business environment, driving economic growth and enhancing Hong Kong’s competitiveness. Clients who wish to explore how they can benefit from the new law can contact their tax executives.
Tax rates
Assessable Profits
Corporations Unincorporated businesses
First HK$2 million
8.25% 7.5%
In excess of the first HK$2 million
16.5% 15%
In order to primarily benefit small and medium enterprises (SMEs) and startups, and to prevent income splitting, the new law contains restrictive provisions prescribing that “connected entities” can only elect a single entity as eligible for the two-tiered regime for a given year of assessment. Clients may refer to our Hong Kong Tax alert issued on 3 January 2018 (2018 Issue No. 1) for the definition of “connected entities”.
No double benefits for taxpayers that are eligible for the preferential half-rate tax regimes
In order to avoid double benefits for taxpayers, the new law contains a provision whereby those corporations which have elected to be subject to the special half-rate tax regimes for profits derived from their businesses of professional reinsurers, captive insurers, corporate treasury centers, aircraft lessors or aircraft leasing managers, will be excluded from being eligible for the two-tiered regime in respect of their other assessable profits.
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APAC No. 03006347ED None.
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.
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EY Asia-Pacific Business Tax Services Leader
Tracy Ho+852 2846 [email protected]
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Chee Weng Lee+852 2629 [email protected]
Hong Kong Business Tax Services partners, Ernst & Young Tax Services Limited
Agnes Chan+852 2846 [email protected]
Owen Chan+852 2629 [email protected]
Wilson Cheng+852 2846 [email protected]
May Leung+852 2629 [email protected]
EY Contacts
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