Tax
Hong Kong's Two-Tier Profits Tax Explained for Foreign Founders
How Hong Kong taxes company profits: the 8.25% and 16.5% rates, who can use the lower tier, how much tax a typical small company actually pays, and the filing rhythm to expect.
Ask a founder why they chose Hong Kong and the answer often starts with tax. But "Hong Kong has low taxes" hides the detail that actually decides what you pay: how the two rates work, who qualifies for the lower one, and which profits count in the first place.
This guide covers the essentials for a foreign-owned company.
The two rates
Since the 2018/19 year of assessment, Hong Kong has taxed corporate profits in two tiers:
| Assessable profits | Rate for corporations | Rate for unincorporated businesses |
|---|---|---|
| First HK$2 million | 8.25% | 7.5% |
| Above HK$2 million | 16.5% | 15% |
The rates were left unchanged in the 2026-27 Budget. The Budget did, however, include a one-off reduction of 100% of final profits tax for 2025/26, capped at HK$3,000 per business.
What that means in real numbers
Because the lower rate applies to the first HK$2 million, small and medium-sized companies pay noticeably less than the headline 16.5%.
| Assessable profits | Tax payable | Effective rate |
|---|---|---|
| HK$500,000 | HK$41,250 | 8.25% |
| HK$2,000,000 | HK$165,000 | 8.25% |
| HK$3,000,000 | HK$330,000 | 11.0% |
| HK$10,000,000 | HK$1,485,000 | 14.85% |
At HK$2 million of profit, the saving compared with a flat 16.5% rate is HK$165,000 a year.
Who can use the lower tier
The most common surprise for international owners is the connected entities rule. If two or more companies are connected, for example because they are under common control, only one of them can elect to use the two-tier rates for a year of assessment. The others pay 16.5% on all their profits.
This matters if you plan several Hong Kong companies, such as one for trading and one for holding intellectual property. It is usually better to decide which entity should benefit before the first tax return, rather than discovering the rule afterwards. This is one of the points we cover in the tax structure consultation included with incorporation.
Which profits are taxed at all
Hong Kong taxes on a territorial basis. Only profits that arise in or are derived from Hong Kong are chargeable. Profits genuinely earned outside Hong Kong may not be taxed at all, even if the money is received into a Hong Kong bank account.
Whether profits are Hong Kong-sourced depends on what the company does and where it does it, not simply on where it is registered. It is a question of fact, and it needs evidence. We explain how it works in our guide to the offshore profits exemption.
What is not taxed
Part of Hong Kong's appeal is the list of taxes it does not levy:
- No VAT or GST on sales.
- No capital gains tax. Gains on capital assets are generally not taxable, although trading gains are.
- No withholding tax on dividends paid to shareholders, wherever they live.
- No withholding tax on interest paid by most companies.
Royalties paid to non-residents are the main exception: they are taxed at a low effective rate, which tax treaties can reduce further.
Deductions and losses
Expenses are deductible to the extent they are incurred in producing assessable profits. That typically includes salaries, rent, professional fees, interest on business borrowing and depreciation allowances on equipment.
Tax losses can be carried forward indefinitely and set against future profits of the same company. They cannot be carried back.
The filing rhythm
Hong Kong's tax year, the year of assessment, runs from 1 April to 31 March, but companies can choose their own financial year end.
- A new company usually receives its first profits tax return around 18 months after incorporation.
- Afterwards, returns are typically issued each April, and must be filed with audited financial statements.
- Tax is assessed after filing and normally paid in two instalments, together with provisional tax, an advance payment for the following year based on the current year's profits.
If you engage a tax representative, extended filing deadlines are usually available under the Inland Revenue Department's block extension scheme. We handle this as part of corporate tax filing. Our annual compliance calendar for Hong Kong companies lists the current extended dates.
Frequently asked questions
What is the corporate tax rate in Hong Kong?
Profits tax for corporations is 8.25% on the first HK$2 million of assessable profits and 16.5% on profits above that. Unincorporated businesses pay 7.5% and 15%.
Can every company use the 8.25% rate?
No. Where companies are connected (for example, under common control), only one of them can elect the two-tier rates for a given year.
When is profits tax paid?
The Inland Revenue Department issues profits tax returns annually, usually in April. Tax is assessed after filing and paid in instalments, together with provisional tax for the following year.
Sources
This article is general information, not legal or tax advice. Rules and figures can change; confirm details for your situation before acting.
