Hong Kong’s two-tiered profits tax regime is often one of the first tax rules that founders, SMEs and outbound businesses meet when they start using a Hong Kong company. The first HK$2 million of assessable profits may be taxed at a lower rate, but a group of connected entities generally cannot apply that benefit across every company. For a business using one Hong Kong company for receipts, another entity for operations and a holding company above them, the rate table is only the starting point. The harder questions are which entities are connected and which one should be nominated. This article explains how the rates work, how the calculations are made, and how connected entities should think about nomination. It is general information only; the actual tax position depends on the facts of each case and professional tax advice should be sought where needed.
What Are Hong Kong’s Two-Tiered Profits Tax Rates?
Hong Kong’s two-tiered profits tax rates have applied from the 2018/19 year of assessment, meaning years of assessment commencing on or after 1 April 2018. According to the Inland Revenue Department FAQ and the GovHK profits tax rates page, assessable profits are split into the first HK$2 million and the excess above HK$2 million:
| Business type | First HK$2,000,000 of assessable profits | Assessable profits above HK$2,000,000 |
|---|---|---|
| Corporations, such as limited companies | 8.25% | 16.5% |
| Unincorporated businesses, such as sole proprietorships or partnerships | 7.5% | 15% |
The 8.25% corporate rate is half of the standard 16.5% profits tax rate. The 7.5% rate for unincorporated businesses is half of the 15% standard rate. When the Inland Revenue (Amendment) (No. 3) Ordinance 2018 was gazetted on 29 March 2018, the Government stated that the regime was intended to reduce the tax burden on enterprises, especially SMEs and start-ups.
How Is the First HK$2 Million Taxed? Three Examples
Example A: Corporate Profits Below HK$2 Million, No Connected Entity
If a Hong Kong limited company has assessable profits of HK$1,500,000 and no other connected entity has been nominated, the full amount may be taxed at 8.25%:
HK$1,500,000 × 8.25% = HK$123,750.
Example B: Corporate Profits Above HK$2 Million, No Connected Entity
If assessable profits are HK$2,500,000, the calculation is split into two bands: first HK$2,000,000 × 8.25% = HK$165,000; remaining HK$500,000 × 16.5% = HK$82,500; total HK$247,500.
Example C: Sole Proprietorship With HK$2,500,000 of Profits
For an unincorporated business, the 7.5% and 15% rates apply: first HK$2,000,000 × 7.5% = HK$150,000; remaining HK$500,000 × 15% = HK$75,000; total HK$225,000.
These examples do not account for other deductions, loss offsets, provisional tax or one-off concessions. The final tax liability depends on the business records, the applicable tax rules and the assessment made by the Inland Revenue Department.
How Much Tax Can Be Saved Per Year?
For a corporation, the maximum annual rate differential on the first HK$2 million is HK$2,000,000 × (16.5% − 8.25%) = HK$165,000.
For an unincorporated business, the corresponding figure is HK$2,000,000 × (15% − 7.5%) = HK$150,000. These are the same maximum savings cited in the Government’s 2018 press release. At the time, the Government estimated that, assuming 20% of tax-paying enterprises were connected enterprises, the regime would reduce annual tax revenue by around HK$5.8 billion.
What Is a Connected Entity? The >50% Control Test and the One-Nomination Rule
The main trap in the two-tiered regime is not the rate itself. It is the connected entity rule. The IRD FAQ states that if an entity has one or more connected entities at the end of the basis period for a year of assessment, the two-tiered rates apply only to one nominated entity. The other connected entities are generally taxed on all assessable profits at 16.5% or 15%, depending on their status.
Three Common Connected Entity Situations
An entity is connected with another where one controls the other, both are under the control of the same entity, or the same natural person carries on more than one sole proprietorship business. An entity can include a natural person, a body of persons or a legal arrangement, such as a corporation, partnership or trust.
Control Means More Than 50%, Not Exactly 50%
In broad terms, control means directly or indirectly owning or controlling more than 50% of issued share capital, being entitled to exercise or control more than 50% of voting rights, or being entitled to more than 50% of capital or profits. Exactly 50% is not the same as more than 50%, but voting arrangements, trust interests, profit rights and side agreements can change the analysis.
Excluded Situations
A corporation that has elected for certain half-rate regimes, such as qualifying insurance business, corporate treasury centre treatment, aircraft leasing or ship leasing regimes, cannot use the two-tiered rates for that corporation. Qualifying debt instruments and other concessionary items also need to be analysed under their own provisions.
How Should Connected Entities Choose the Nominee? A Six-Step Framework
First, map all connected entities. Include limited companies, partnerships, sole proprietorships and indirect ownership chains. If Company A owns 80% of Company B and Company B owns 100% of Company C, A may still indirectly control C by more than 50%.
Second, estimate each entity’s assessable profits for the relevant year. The two-tiered rates apply to assessable profits, not turnover, gross receipts or bank balance. A loss-making entity may not generate an immediate rate benefit.
Third, where one entity in the group has profits at or above HK$2 million, nominating that higher-profit entity will often capture the maximum rate differential: up to HK$165,000 for a corporation or HK$150,000 for an unincorporated business.
Fourth, compare the group’s total tax under “nominate Entity A” versus “nominate Entity B”. The best outcome is not determined by looking at one company’s tax bill in isolation. Nominating the higher-profit entity is often more efficient, but the actual difference depends on the profit distribution.
Fifth, review the nomination each year. Different connected entities may elect for the two-tiered rates in different years, provided the conditions are satisfied. However, once an election is made for that year of assessment, it cannot be withdrawn for that year.
Sixth, make accurate declarations in the tax return. Corporations usually deal with this through BIR51, partnerships through BIR52 and sole proprietors through the individual tax return BIR60. Incorrect or incomplete declarations may lead to additional assessments, penalties and interest.
This is a decision framework, not a guaranteed tax-saving formula. The optimal nomination depends on the financial data, ownership and control structure, source of income analysis and professional tax advice.
Five Common Misunderstandings
Misunderstanding 1: Set up several companies and each gets 8.25%. Incorrect. Connected entities generally can nominate only one entity for the two-tiered rates in the same year of assessment.
Misunderstanding 2: A 50% shareholding always creates a connected entity. Not necessarily. The statutory control threshold refers to more than 50%, but voting rights, profit entitlements and contractual arrangements still need to be checked.
Misunderstanding 3: If spouses each own one company, the companies must always be grouped. Not always. If different natural persons separately control different companies with no cross-control, they may not be connected under this rule. Joint ownership, nominee arrangements or coordinated control should be reviewed case by case.
Misunderstanding 4: Failing to disclose connected entities is harmless. It is not. The tax return requires declarations, and incorrect information may result in additional tax, penalties and interest.
Misunderstanding 5: Electing for the two-tiered rates is always the most tax-efficient choice. Not necessarily. Sole proprietors may also need to compare personal assessment, while cross-border groups may need to consider source of profits, foreign-sourced income exemption, top-up tax and broader compliance costs.
What Changed in 2024–2026? Rates Unchanged, One-Off Concessions Updated
As of the GovHK profits tax rates page revised in May 2026, the two-tiered rate structure remains unchanged: 8.25% and 16.5% for corporations, and 7.5% and 15% for unincorporated businesses. The items that tend to move more often are the one-off profits tax concession caps:
- 2025/26: 100% reduction of profits tax, subject to a ceiling of HK$3,000 per case.
- 2024/25: 100% reduction of profits tax, subject to a ceiling of HK$1,500 per case.
- 2023/24: 100% reduction of profits tax, subject to a ceiling of HK$3,000 per case.
These concessions generally apply to final tax, not provisional tax, and should be read by year of assessment and business case.
Large multinational groups should also keep BEPS 2.0 in view. Hong Kong has implemented the 15% global minimum tax and Hong Kong minimum top-up tax from 2025 for large MNE groups. Most ordinary outbound SMEs will not be affected, but groups near the relevant scale, jurisdictional or effective-tax-rate thresholds should seek separate advice.
Practical Notes for Outbound Businesses
Businesses from Mainland China, Taiwan, Malaysia and other Chinese-speaking markets often use Hong Kong companies alongside holding, operating, trading or payment collection entities. In that setting, the tax question is not merely “which company made the profit”. It also includes who controls whom, which entity should be nominated, whether the income falls within the Hong Kong profits tax charge, and whether FSIE, personal assessment or other filing obligations are relevant.
Chan & Chung is a Hong Kong outbound business consultancy that can help founders review their Hong Kong company structure and compliance needs, working with accounting, tax and legal professionals where case-specific advice is required. Regulated trust or company services are provided by the licensed TCSP, Intelligent Services Limited (licence number TC010349), not by Chan & Chung Consultancy Services Limited itself.
FAQ
Can the nominated entity be changed every year?
Yes. Where all relevant conditions are met, different connected entities may elect for the two-tiered profits tax rates in different years of assessment. Once an election is made for a particular year, it cannot be withdrawn for that year.
Can a newly incorporated company use the two-tiered rates?
Yes, if it has assessable profits and satisfies the relevant conditions. If it has connected entities at the end of the basis period, the one-nomination rule still needs to be applied.
Does a loss-making entity need to care about this?
The rate itself may not have an immediate tax effect where there are no assessable profits, but return filing and connected entity declarations should still be handled properly.
Are non-Hong Kong revenues automatically taxed under the two-tiered rates?
No. That question involves Hong Kong’s territorial source principle and the foreign-sourced income exemption regime. Whether income is chargeable to Hong Kong profits tax cannot be answered by the two-tiered rate table alone and should be assessed based on contracts, operations, decision-making and money flows.
Official References
- Inland Revenue Department: Two-tiered Profits Tax Rates FAQ
- GovHK: Profits Tax Rates
- Hong Kong Government press release: Two-tiered profits tax rates regime to be implemented from April 1
Call to Action
Connected entity nomination, cross-border structuring and tax filing can affect one another. If you are using Hong Kong companies to receive overseas revenue, manage several group entities or prepare annual filing, start by organising the ownership chart, profit forecasts, income-source facts and compliance documents before seeking professional advice. Nothing in this article constitutes a guarantee of tax savings, legal advice or case-specific tax advice; the right arrangement depends on the facts.