The Chief Executive, Mrs. Carrie Lam announced in her first Policy Address a wide range of measures with an aim to enhance Hong Kong’s competitiveness and reinforce Hong Kong’s position as an international financial and economic centre. This alert focuses on the tax related measures.
A two-tier profits tax system
For the purpose of mitigating the tax burden of Hong Kong enterprises (particular small and medium-sized enterprises (“SMEs”), a two-tier profits tax system is introduced. Under the proposal, the profits tax rate of the first HK$2 million of profits of enterprises will be lowered to 8.25% (i.e. half of the standard profits tax rate), and profits above will remain to be taxed at the standard profits tax rate of 16.5%.
To avoid abuse and ensure that the tax benefits will target SMEs which represent 98% of businesses in Hong Kong, it is apparent that there will be anti-avoidance provisions such that only one enterprise of a business group will be eligible for the lower tax rate. The definition of “business group” is nevertheless to be clarified at a later stage.
Super deduction for research and development (“R&D) expenditure
A super deduction for R&D expenditure is introduced to encourage more private expenditure on R&D and innovation and technology development. It was proposed that the first HK$2 million eligible R&D expenditure enjoy a 300% tax deduction with the remaining at 200%.
Expansion of double taxation agreement (“DTA”) network
The Chief Executive expressed in the Policy Address the Government’s objective to expand Hong Kong’s DTA partners from currently 38 to 50 (especially those along the Belt and Road) over the next few years.
Based on the current available information, it goes without saying that SMEs, start-up enterprises and innovation and technology enterprises will be the most beneficial parties from the Policy Address in tax perspective. Having said that, the extent of tax benefits to which they can enjoy heavily depends on the drafting of the relevant legislation such as qualifying criteria, application process, anti-avoidance provisions, etc.
For a detailed discussion or any enquiry, please contact one of our members of the Tax Advisory team.