two-tiered profits tax rates

Hong Kong implemented the two-tiered profits tax rates system to help SMEs. The first HK$2 million of a business’s profits would be taxed at a lower rate, while the remaining amount, if any, at the standard rate. This is a scheme with which a lighter tax burden on smaller businesses. Moreover, it also promotes growth and innovation in the SME sector in Hong Kong.

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    How It Differs from the Standard Profits Tax

    Basically, the major difference between two-tiered profit tax rates and standard profit tax system is in its rate structure. While there is a standard profits tax rate of 16.5%, for corporations the two-tiered system followed, the rate being 8.25% on the first HK$2 million in profits, thereby significantly reducing taxation for small-scale enterprises.

    Breakdown of the Two-Tiered Profits Tax System

    First HK$2 Million Profits at 8.25%

    Under the two-tiered system, the first HK$2 million of profits would be chargeable at a lower tax rate of 8.25%. This reduced rate would be applicable for both corporations and other businesses. The SMEs would save their core amount of money as taxes to be reinvested in business development.

    Above HK$2 Million Profits at 16.5%

    If the actual profits exceed HK$2 million, the standard tax rate will be applicable at 16.5%. It is a two-tiered system, which allows smaller businesses to enjoy a lower rate. On the other hand, larger companies, with a bigger profit, contribute normally to the government.

    Eligibility Criteria for the Two-Tiered Profits Tax Rates

    Who Can Benefit

    The two-tiered tax rates favour SMEs, which form the backbone of Hong Kong’s economy. The businesses must not be part of a larger corporate group that is already enjoying the lower tax rate. Larger enterprises are exemption for claiming the tax concession.

    Limitations on Group Companies

    Only one company in a group of companies can claim the two-tiered tax rate for the first HK$2 million of profits. The reason behind this is to prevent companies from claiming the two-tiered tax rate more than once.

    Computation of Tax under the Two-Tiered Regime

    Here is how businesses can work out their tax liability under the two-tiered profits tax rates:

    Total profits: First, determine the total taxable profits for the financial year.

    Apply 8.25% on first HK$2 million: The first HK$2 million will be taxed at the lower rate of 8.25%.

    Apply 16.5% on the amount above HK$2 million: Every dollar more is taxed at 16.5%.

    Total tax liability: This is just adding the two calculations together to arrive at a total tax liability.

    Examples of Tax Savings

    For instance, when a company has a profit of HK$3 million:

    The tax liability on the first HK$2 million is 8.25 percent, thus HK$165,000.

    The remaining HK$1 million, which is at 16.5 percent, will add another HK$165,000.

    Total tax liability = HK$165,000 + HK$165,000 = HK$330,000.

    At the normal 16.5%, the total tax would have amounted to HK$495,000, a big saving for the SME.

    Benefits of the Two-Tiered Profits Tax Rates

    By lessening the tax burden on smaller companies, the two-tier system encourages SME growth. This lower rate allows companies to reinvest their money in operation activities. That will definitely facilitate expansion, innovation, and the opening of employment opportunities.

    Conclusion: Why Businesses Should Understand the Two-Tiered Profits Tax Rates

    The two-tiered profits tax rates continue the generous tax savings for the SMEs in Hong Kong. And, it offers a concessional rate of 8.25% on the first HK$2 million in profits, to assist their growth. This system, along with many others, encourage to foster entrepreneurship and attract foreign investment.

    How FastLane HR Can Help

    FastLane HR provides professional support on how to sail through Hong Kong’s profits tax rate with two-tiered system. We make sure your company is in compliance with the system. Moreover, we can help you prepare tax returns as accurately as possible to assure long-term optimization of your tax planning. For more information about the services we offer to help you reach your financial and business goals. Contact us today!

    The official website Hong Kong government, Inland Revenue Department (IRD) is the main source of this blog.