The Inland Revenue (Amendment) (No. 3) Ordinance 2018 was enacted on 29 March 2018. The amendment ordinance has introduced two-tiered profits tax rates for corporations and unincorporated businesses by lowering the tax rate for the first HK$2 million of assessable profits with effect from the year of assessment 2018/19. However, for two or more connected entities, only one of them may elect the two-tiered profits tax rates.
What are the two-tiered profits tax rates?
Under the two-tiered profits tax rates regime, the profits tax rate for the first HK$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 HK$2 million will continue to be subject to the rate of 16.5% for corporations and standard rate of 15% for unincorporated businesses.
What is an entity?
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.
How is "connected entity" defined?
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.
How is "control" determined?
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.