By KYN AI Advisory Team — AI implementation specialists, Singapore
Hong Kong charges profits tax on a corporation at 8.25% on the first HK$2 million of assessable profits and 16.5% on the rest. On HK$3 million of profit that is HK$330,000 of tax, against HK$495,000 at a flat 16.5%. The catch is connected entities: if you control more than one company, only one of them can use the lower tier in a given year, and you must nominate it in the tax return. This article works through three examples and the nomination rule.
What are the two-tier profits tax rates?
The Inland Revenue Department sets them out in its FAQ on the two-tiered profits tax rates regime.
| Taxpayer | First HK$2 million | Above HK$2 million | |---|---|---| | Corporation | 8.25% | 16.5% | | Unincorporated business (mostly partnerships and sole proprietorships) | 7.5% | 15% |
The lower rate is half the standard rate. The threshold of HK$2 million applies to each qualifying entity. For partnerships, the HK$2 million is divided among the partners according to their profit-sharing ratios. A corporate partner receives the 8.25% rate on its share and a non-corporate partner receives 7.5%.
The base is assessable profits: profit from the trade or business in Hong Kong, after allowable deductions. The regime changes the rate, not the base. Accounts, adjustments and the source of profit still drive the number you apply the rates to.
Worked example: one company
A Hong Kong company has assessable profits of HK$3,000,000.
| Step | Calculation | Tax (HK$) | |---|---|---| | First tier | 2,000,000 x 8.25% | 165,000 | | Second tier | 1,000,000 x 16.5% | 165,000 | | Total | | 330,000 | | Flat 16.5% for comparison | 3,000,000 x 16.5% | 495,000 | | Saving | | 165,000 |
The saving is capped. At any profit above HK$2 million, the benefit is the same HK$165,000, which is HK$2,000,000 x (16.5% - 8.25%). A company earning HK$20 million saves the same HK$165,000 as one earning HK$3 million.
For a company with assessable profits below HK$2 million, all profit is taxed at 8.25%. On HK$1,500,000 the tax is HK$123,750.
Worked example: a group of connected companies
The saving does not multiply across companies. IRD's rule is that two or more connected entities cannot both use the two-tiered rates for the same year. Unless one entity is nominated, none of them gets the lower tier.
Entities are connected if one controls the other, if both are under the same controlling entity, or if a sole proprietor runs more than one sole proprietorship. Control generally means owning or controlling more than 50% of shares, voting rights, capital or profits, directly or indirectly.
Take a founder who owns 100% of Company A and Company B, with profits of HK$2,500,000 and HK$1,000,000.
| Option | Company A | Company B | Total tax (HK$) | |---|---|---|---| | Nominate A | 165,000 + 500,000 x 16.5% = 247,500 | 1,000,000 x 16.5% = 165,000 | 412,500 | | Nominate B | 2,500,000 x 16.5% = 412,500 | 1,000,000 x 8.25% = 82,500 | 495,000 |
Nominating A saves HK$82,500 more than nominating B. The rule is to nominate the entity with the larger profit, because the HK$165,000 benefit applies in full when profit exceeds HK$2 million. If A had profits of only HK$1,000,000 and B HK$1,000,000, the choice would not change the total: HK$82,500 of benefit in either case.
The rule of thumb: nominate the entity whose profit exceeds HK$2 million, because the full HK$165,000 benefit applies there. When every entity earns less than HK$2 million, compare the totals both ways before you choose.
How do you elect the lower tier?
The IRD describes two cases.
- With connected entities. The nominated entity declares in its Profits Tax Return (corporations and partnerships) or its Tax Return for Individuals (sole proprietorships) that it is chargeable at the two-tiered rates for that year. No other connected entity may elect for the same year. The election is irrevocable for that year, but a different connected entity may elect for a different year.
- Without connected entities. The entity must declare at the end of the basis period that it has no connected entities. For convenience, it can state in its tax return that it is chargeable at the two-tiered rates.
Incorrect declarations may attract heavy penalties for a return made without reasonable excuse, and the IRD may raise additional assessments at the standard rates.
How does this compare with Singapore?
A group with companies in both places meets two different designs. Singapore taxes companies at a flat 17%, and reduces the income that rate applies to through exemptions. IRAS states that its partial tax exemption gives 75% off the first S$10,000 and 50% off the next S$190,000, and its start-up exemption gives 75% off the first S$100,000 and 50% off the next S$100,000 for the first three years of assessment. The figures are on IRAS's page for corporate income tax rate, rebates and exemption schemes. See also start-up tax exemption in Singapore.
Hong Kong changes the rate instead, and limits the lower rate to one connected entity per year. Neither system rewards splitting a business purely to multiply the lower band. Both ask you to know your group structure and your profit by entity.
What mistakes do SMEs make?
- Assuming each company gets HK$2 million at 8.25%. Splitting a business into several companies does not multiply the lower tier. The connected-entity rule removes it.
- Missing a controlling link. Control is above 50% of shares, voting rights, capital or profits, directly or indirectly. A holding structure or a family arrangement can create a link the founder did not think about.
- Not planning the nomination year by year. The election is for one year. A different connected entity can be nominated next year, so review it as profits shift.
- Forgetting that profit sits in the entity. The nomination follows the legal entity that earns assessable profits, not the brand or the team.
- Treating the regime as a tax plan. It is a rate rule. Revenue sourcing, deductions and timing still decide assessable profit.
How do you track this during the year?
Founders who run two or more entities need a view of year-to-date assessable profit per entity before the year ends, so the nomination is a decision, not a guess. A monthly sheet with five columns does the job:
- entity;
- year-to-date accounting profit;
- known tax adjustments;
- estimated assessable profit;
- estimated tax at the lower and standard rates, with and without nomination.
Revisit it at the half year and at the end of the basis period, then confirm the position with your tax representative before the return is filed.
Where KYN fits
KYN builds finance and reporting systems in your own cloud account for SMEs in Singapore, Hong Kong, Indonesia and Malaysia. A multi-entity profit view per company, in Hong Kong dollars with a bilingual interface where needed, is a reporting build. Every action is logged with the actor, and filings wait for a named person. KYN does not file tax returns and does not give tax advice.
The first 14 days are a review of your stack and interviews with your team. A full build ships in under 90 days. See finance systems and Hong Kong annual return and audit deadlines.
Frequently asked questions
Does the 8.25% rate apply automatically?
Not always. With connected entities, one must be nominated in its return. Without connected entities, the entity declares that it has none, and for convenience can state in its return that it is chargeable at the two-tiered rates. See the IRD FAQ for the exact process.
Can I change the nominated entity next year?
Yes. The IRD states that the election is irrevocable for that year, and a different connected entity may elect for a different year.
Do sole proprietorships get the same rates?
They get 7.5% on the first HK$2 million and 15% above it, according to the IRD. Each sole proprietorship is a separate entity, so only one of a person's businesses can be nominated.
Checked 30 October 2026.
Curious whether Marketing agents fits your business? Talk to KYN on WhatsApp — no forms, just a conversation.
