In her 2017 Policy Address on October 11, Lam said the
government would introduce the two-tier system to enhance Hong
Kong’s competitiveness, support targeted industries and steer
economic activities. The government will prepare legislation
with a view to introduce the regime in 2018.
Under the plan, the tax rate for the first HK$2 million
($193,000) of company profits will be lowered to 8.25%, or half
of the standard profits tax rate. However, the reduced 8.25%
rate will not be available to all companies. To ensure the
lower rate benefits small and medium-sized enterprises, only
one enterprise in a group of companies can be nominated to
enjoy the low rate. The lower rate was originally expected to
be 10%, so the proposed lower rate of 8.25% is good news for
companies that will benefit from next year.
Profit over HK$2 million will continue to be subject to the
standard tax rate of 16.5%. Nevertheless, this standard rate is
still lower than the Asia and OECD averages, as well as the
standard rates in mainland China, Singapore, South Korea,
Indonesia, the Philippines, and Vietnam.
“A two-tier tax system of this type can add a lot of
complexity,” said Steven Sieker, Asia Pacific head of Baker
McKenzie’s tax practice. “While there are a lot of
examples of this type of legislation in other jurisdictions, it
could prove to be a major source of complexity for Hong Kong
which has long had a single rate applicable to all companies in
all industries and has not distinguished between foreign or
Hong Kong’s decision to alter the tax system to
favour SMEs is no surprise, according to Sieker. “Small
business drives the majority of employment in most
jurisdictions and Hong Kong is no exception. For that
reason tax incentives to encourage SME development are both
popular and probably good for the economy,” he said.
“That said, any time you distinguish between categories of
taxpayers you add complexity, and each added complexity moves
Hong Kong incrementally away from being a low rate and simple
tax system to one that is still low rate, but slightly less
simple than before.”
However, Jeremy Choi, partner of tax services at PwC in Hong
Kong, believes that two-tier system is quite simple, but may go
beyond its intended objective. “It may have slightly deviated
from the original public expectation as it will not just reduce
the tax burden of SMEs but also other non-SME companies.”
Nevertheless, Choi believes the effect of the two-tier
should be neutral because “foreign investment is attracted to
Hong Kong not only because of its tax system and tax
incentives, but also the various factors that contribute to
Hong Kong’s business environment (including the
protection of intellectual property rights, free flow of
information, absence of exchange control, etc.)”.
“In addition, since the two-tier tax system is not
specifically aimed at attracting foreign investment, such
measure would unlikely have any significant effect on foreign
investment despite that it is a positive measure to the Hong
Kong business environment,” Choi continued.
Under the new system, companies will be able to save up to
HK$130,000 of Hong Kong profits tax, according to Choi.
However, re-investment of those savings is not guaranteed.
“Whether the companies would invest such tax saving into the
area of R&D will largely depend on their own business
needs,” Choi said.
To encourage reinvestment, however, the government intends
to reward innovation under its tax plans. Lam said the first
HK$2 million of eligible R&D expenditure will enjoy a 300%
tax deduction with the remainder at 200% to encourage companies
to invest in technological R&D. In addition, the government
will set aside no less than HK$10 billion as university
research funding to encourage private companies to increase
investment in R&D.
Other changes mentioned in Lam’s Policy Address
Extending the application of the Multilateral Convention (MLI)
to Hong Kong via legislative changes to facilitate the
automatic exchange of tax information;
Introducing a bill to implement the OECD’s BEPS
Ensuring the government works with the Legislative Council on
its scrutiny of the legislation to implement the profits tax
exemption arrangement and operational and procedural details
for open-ended fund companies;
Working with industry to strengthen publicity and promote the
development of aircraft leasing business following the
amendment to the Inland Revenue Ordinance (Cap. 112) in June
2017 to give profits tax concessions to qualifying aircraft
lessors and qualifying aircraft leasing managers to attract
companies to develop aircraft leasing business in Hong
Continuing to grow Hong Kong’s tax treaty network
to 50 in the next few years; and
Offering a tax deduction for the purchase of regulated health
insurance products to encourage the public to use private
The government will hold a summit on October 23 to consult
with stakeholders on the tax plans.