Profits tax on the two-tiered rates for a company or an unincorporated business.
Profits tax payable
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Tax on first HK$2m
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Tax on remainder
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Effective rate
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Profit after tax
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Your breakdown
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Tier
Amount (HKD)
Worked example
Take a limited company with HK$3,000,000 of assessable profits. Under the two-tiered system the first HK$2,000,000 is taxed at 8.25 percent, which is HK$165,000. The remaining HK$1,000,000 is taxed at the full 16.5 percent, which is another HK$165,000. Adding the two tiers gives total profits tax of HK$330,000. That works out to an effective rate of 11 percent on the whole HK$3,000,000, lower than the headline 16.5 percent because the first slice enjoys the reduced rate. After tax the company keeps HK$2,670,000 of its profit. An unincorporated business with the same profit would use 7.5 and 15 percent instead.
How it is calculated
Hong Kong profits tax uses two tiers to give smaller businesses a lower rate on their first slice of profit. For a company the first HK$2,000,000 of assessable profits is charged at 8.25 percent and everything above that at 16.5 percent. For an unincorporated business such as a sole proprietorship or partnership the two rates are 7.5 percent and 15 percent. Assessable profits are accounting profits adjusted for tax, so non-deductible expenses are added back and items like depreciation are replaced with tax allowances. The reduced first-tier rate can only be claimed by one entity within a group of connected entities, to stop groups splitting profits across many companies. There is no separate surcharge or local profits levy on top, so the two-tier figure is the full liability.
Frequently asked questions
How is profits tax calculated in Hong Kong?
Profits tax uses a two-tiered system. For a company the first HK$2,000,000 of assessable profits is taxed at 8.25 percent and the remainder at 16.5 percent. For an unincorporated business such as a sole proprietor or partnership the rates are 7.5 percent and 15 percent. The lower rate on the first HK$2,000,000 can only be claimed by one entity within a group of connected entities.
Who is subject to Hong Kong profits tax?
Any person carrying on a trade, profession, or business in Hong Kong is subject to profits tax on assessable profits arising in or derived from Hong Kong. This covers both resident and non-resident entities with a taxable presence in Hong Kong. Passive investment income such as dividends received from a subsidiary is generally not taxable.
What deductions are allowed against assessable profits?
Allowable deductions include expenses incurred wholly and exclusively in producing assessable profits, such as staff costs, rent, and interest on borrowings used for the business. Capital expenditure is not deductible directly but qualifying plant and machinery attracts depreciation allowances. Losses from prior years can be carried forward indefinitely to offset future profits of the same business.
Can a group of companies each claim the lower first-tier rate?
No. Only one entity within a group of connected entities may apply the reduced first-tier rate of 8.25 percent (or 7.5 percent for unincorporated businesses) to its first HK$2,000,000 of assessable profits. All other group members are taxed at the full standard rate on their entire assessable profits. The Inland Revenue Ordinance defines connected entities broadly to prevent artificial profit-splitting arrangements.