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1.

Q:

What are the two-tiered profits tax rates?

 
 

A:

Under the two-tiered profits tax rates regime, the profits tax rate for the first $2 million of assessable profits will be lowered to 8.25% (half of the rate specified in Schedule 8 to the Inland Revenue Ordinance (IRO)) for corporations and 7.5% (half of the standard rate) for unincorporated businesses (mostly partnerships and sole proprietorships). Assessable profits above $2 million will continue to be subject to the rate of 16.5% for corporations and standard rate of 15% for unincorporated businesses.

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2.

Q:

Which taxpaying entities would qualify for the two-tiered profits tax rates?

 
 

A:

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. See Q3 below.

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3.

Q:

Which taxpaying entities would not qualify for the two-tiered profits tax rates?

 
 

A:

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 one which 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.

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4.

Q:

If part of the assessable profits of a taxpaying entity is derived from qualifying debt instruments which is subject to the half rate under section 14A(1) of the IRO, would the taxpaying entity qualify for the two-tiered profits tax rates in respect of its remaining assessable profits?

 
 

A:

Yes. The taxpaying entity can still qualify for the two-tiered profits tax rates in respect of its assessable profits derived from normal trading receipts.

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5.

Q:

What is an entity?

 
 

A:

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.

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6.

Q:

How is "connected entity" defined?

 
 

A:

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.

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7.

Q:

How is "control" determined?

 
 

A:

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.

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8.

Q:

What is the profits tax rate for a taxpaying entity under the two-tiered profits tax rates regime if it has connected entities?

 
 

A:

The two-tiered profits tax rates would not apply to the taxpaying entity. The whole of the taxpaying entity's assessable profits will be chargeable to Profits Tax at the rate of 16.5% or standard rate of 15%, as applicable. However, the Commissioner may apply the two-tiered profits tax rates to one of the connected entities for a year of assessment if that entity elects the two-tiered rates.

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9.

Q:

Further to Q8, how can an entity make an election for the two-tiered profits tax rates if it has connected entities?

 
 

A:

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.

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10.

Q:

Can more than one connected entity elect the two-tiered profits tax rates?

 
 

A:

No. An entity's election is effective only if no other connected entity has made an election for the same year of assessment. However, a different connected entity may elect the two-tiered profits tax rates for a different year of assessment if all conditions are met.

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11.

Q:

How is a taxpaying entity charged to Profits Tax if the election for the two-tiered profits tax rates is ineffective or no election has been made?

 
 

A:

Subject to other applicable provisions of the IRO, the whole of the taxpaying entity's assessable profits will be chargeable to Profits Tax at the rate of 16.5% or 15%, as applicable.

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12.

Q:

Can the two-tiered profits tax rates be applied to two or more sole proprietorship businesses owned by the same sole proprietor?

 
 

A:

No. 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. Other sole proprietorship businesses (and other connected entities) would be subject to Profits Tax at the rate of 15% or 16.5%, as the case may be.

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13.

Q:

If a taxpaying entity has no connected entity, is it necessary for the taxpaying entity to make an election for the two-tiered profits tax rates?

 
 

A:

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.

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14.

Q:

When will it be disadvantageous for an individual taxpayer to elect for Personal Assessment under the two-tiered profits tax rates regime?

 
 

A:

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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15.

Q:

If a non-resident person is chargeable to Profits Tax in the name of an agent in Hong Kong, how can an election for two-tiered profits tax rates be made?

 
 

A:

Given that the non-resident person has no connected entity or none of its connected entity/(entities) elects to be so chargeable for the relevant year of assessment, its Assessable Profits can be chargeable at the two-tiered profits tax rates. On completion of the Profits Tax Return (Form BIR 54) for the non-resident person, the subject agent is required to check with the non-resident person to ascertain whether any one of the above criteria for the two-tiered profits tax rates has been met. If so, the agent can declare in the relevant Profits Tax Return that the non-resident person is chargeable at the two-tiered profits tax rates. However, the part of the Assessable Profits of the non-resident person chargeable at the lower rate under the two-tiered profits tax rates for the relevant year of assessment cannot exceed $2 million in total, whether assessed in the subject agent's name or other agents' names.

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16.

Q:

How is the threshold of $2 million applied to the partners in a partnership chargeable at the two-tiered profits tax rates?

 
 

A:

Profits Tax will be chargeable on the first $2 million of assessable profits at the lower rate of 7.5% or 8.25% (for a corporate partner's share of assessable profits). Assessable profits above the threshold will be subject to the higher rate of 15% or 16.5% (for a corporate partner's share of assessable profits). Where applicable, the threshold of $2 million will be apportioned amongst the corporate partners and non-corporate partners in accordance with their profit sharing ratios.

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17.

Q:

The two-tiered profits tax rates will only become operative as from the year of assessment 2018/19. Will the two-tiered profits tax rates be applied to the 2018/19 Provisional Profits Tax assessment?

 
 

A:

Yes. Where applicable, the eligible taxpaying entity will be chargeable to 2018/19 Provisional Profits Tax at the two-tiered profits tax rates. See Q18 below.

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18.

Q:

In what circumstances will a taxpaying entity be chargeable to 2018/19 Provisional Profits Tax at the two-tiered profits tax rates?

 
 

A:

See Q8 to Q13. A taxpaying entity with no connected entity is eligible for the two-tiered profits tax rates. For a taxpaying entity with connected entities, it can make an election for the two-tiered profits tax rates if no other connected entity has made an election. For administrative convenience, where applicable, a taxpaying entity may simply declare in its 2017/18 tax return that it is chargeable to the 2018/19 Provisional Profits Tax at the two-tiered profits tax rates. Once the election is made, it is irrevocable for the 2018/19 Provisional Profits Tax. However, a different entity may elect the two-tiered profits tax rates in 2018/19 tax return for 2018/19 Final Tax and 2019/20 Provisional Profits Tax if all conditions are met.

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19.

Q:

Is Provisional Profits Tax chargeable at the two-tiered profits tax rates a valid ground for applying for holding over of payment of Provisional Profits Tax?

 
 

A:

Yes. This ground only applies to 2018/19 Provisional Profits Tax. Also see Q20 below.

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20.

Q:

If the Provisional Profits Tax of a taxpaying entity has been charged at the two-tiered profits tax rates, can a connected entity of the taxpaying entity apply for holding over of payment of Provisional Profits Tax on the ground that it would be nominated to make an election for the two-tiered profits tax rates for the same year of assessment?

 
 

A:

No. The connected entity does not have a valid ground for applying for holding over of payment of Provisional Profits Tax.

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21.

Q:

Can a taxpaying entity object to or apply for refund of any excessive tax paid due to denial of or omission to elect the two-tiered profits tax rates for the year of assessment 2018/19 and onwards?

 
 

A:

Yes, the provisions of the IRO concerning objections and appeals, and repayment of tax are applicable.

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22.

Q:

What if a taxpaying entity incorrectly declares in its tax return that it has no connected entity or that no other connected entity has made an election for the two-tiered profits tax rates?

 
 

A:

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.