Executive summary

On 29 December 2017, the Hong Kong Government published in the Official Gazette the legislative bill (the Bill)¹ to implement a two-tier profits tax rates regime announced by the Chief Executive in her 2017 Policy Address. The Bill will be presented to the Legislative Council for the first reading on 10 January 2018.

Under the proposal, the tax rates for the first HK$2 million (US$256,000) of profits of corporations and unincorporated businesses (mainly sole proprietorships and partnerships) (UBs) will be reduced by 50%. This Alert summarizes the key provisions of the Bill.

Detailed discussion

The Bill proposes to amend the Inland Revenue Ordinance to introduce a two-tiered profits tax rates regime from the year of assessment 2018/19² as follows:

Only one entity among "connected entities" will be eligible for the proposed regime

The legislative proposal aims to primarily benefit small and medium enterprises and startups, but also to prevent income-splitting. To achieve this goal, the Bill contains restrictive provisions stating that a group of "connected entities"⁴ can only elect one of them to be eligible for the two-tiered profits tax rates regime for a year of assessment.

No double benefits for taxpayers

The Bill contains a provision to avoid double benefits to exclude 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.

In addition, interest, gains or profits derived from qualifying debt instruments that are already subject to tax at half-rates under the existing provision will be excluded from the proposed two-tiered profits tax rates regime.

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ENDNOTES

¹ The Bill referred to is Inland Revenue (Amendment) (No. 7) Bill 2017 and is downloadable from: http://www.gld.gov.hk/egazette/pdf/20172152/es32017215230.pdf.

² Fiscal years ending on or after 1 April 2018.

³ For a corporation that is a partner in a partnership, the 8.25% rate will be limited to the corporation's proportionate share of partnership's profits or losses; the 16.5% rate applies to the corporation's share of any part of the net share of assessable profits of the partnership over the threshold.

⁴ 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; (c) in the case 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.

An entity (entity A) has control over another entity (entity B) if entity A, whether directly or indirectly through one or more other entity: (a) owns or control more than 50% in aggregate of the issued share capital of entity B; (b) is entitled to exercise or control the exercise of more than 50% in aggregate of the voting rights at general meetings of entity B; (c) is entitled to more than 50% in aggregate of the capital or profits of entity B; and (d) in the case entity B being a trust, entity A is entitled to (other than in the capacity of a trustee) a vested interest in more than 50% of the capital of the property of the trust (i) whether the interest is in possession or in remainder or reversion; and (ii) whether the interest is defeasible or not.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

• Tracy Ho
  tracy.ho@hk.ey.com
• Florence Chan, Financial Services
  florence.chan@hk.ey.com

Ernst & Young LLP, Hong Kong Tax Desk, New York

• Charlotte Wong
  charlotte.wong1@ey.com

Ernst & Young LLP, Asia Pacific Business Group, New York

• Chris Finnerty
  chris.finnerty@ey.com
• Kaz Parsch
  kazuyo.parsch@ey.com
• Bee Khun Yap
  bee-khun.yap@ey.com

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ATTACHMENT

PDF version of this Tax Alert