Inland Revenue (Amendment) (No. 3) Ordinance 2018 (the Ordinance), which implements the two-tier profits tax system in Hong Kong, was gazetted on 29 March 2018. The two-tier profits tax rates will be effective from year of assessment 2018/19.
As compared to the bill on the two-tier profits tax system gazetted in December last year, the only technical amendment to the bill reflected in the Ordinance is to clarify that the assessable profits from qualifying debt instruments (QDIs), which are already taxed at half of the applicable standard profits tax rate, would not be counted towards the threshold of the first HK$2 million assessable profits for the purpose of applying the two-tier rates.
The two-tier profits tax system should be a welcomed measure as it will significantly reduce the tax burden of most taxpaying small and medium-sized enterprises (SMEs). However, as only one entity within a group of “connected entities” can enjoy the two-tier rates and an “entity” is defined to include a natural person, business groups with numerous related entities and complex direct and indirect shareholdings will need to conduct a thorough review of the group’s holding structure to ensure that only one connected entity within the group has elected for the two-tier rates.