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27 March 2018 Hong Kong passes legislation for two-tier profits tax rates regime On 21 March 2018, Hong Kong's Legislative Council passed Inland Revenue (Amendment) (No. 7) Bill 2017 (the Bill) which implements the two-tier profits tax rates regime. It is expected to become law (the New Law) on 29 March 2018. The New Law is essentially identical to the Bill.1 The New Law introduces a two-tier profits tax rates regime effective for fiscal years ending on or after 1 April 2018 as follows:
To primarily benefit small and medium enterprises and startups, and to prevent income splitting, the New Law contains restrictive provisions specifying that a group of "connected entities" can only elect one of them to be eligible for the two-tier regime for a year of assessment. The New Law includes a provision 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. The New Law has also clarified that profits derived from qualifying debt instruments, which are already taxed at 8.25%, will not be included in the first HK$2m threshold under the two-tier regime. The Government has indicated that business restructurings, including the amalgamation of companies, involving a transfer of business from one company to another are generally considered as normal commercial activities. As such, tax benefits derived under the two-tier regime as a result of such restructurings will not generally be considered as a tax avoidance arrangement coming into conflict with the New Law. 1 See EY Global Tax Alert, Hong Kong introduces two-tier profits tax rates regime, dated 4 January 2018. Document ID: 2018-5476 | ||||||||||||
