Under the two-tiered regime, a corporation pays 8.25% on the first HK$2 million of assessable profits and 16.5% on the rest. An unincorporated business pays 7.5% and 15%. A company with HK$3 million of assessable profits therefore pays HK$165,000 + HK$165,000 = HK$330,000, instead of HK$495,000 at a flat 16.5%. Only one entity in a group of connected entities can elect the two-tiered rates for a year of assessment; the others pay the full rate on all their profits.
The rates
| First HK$2,000,000 | Above HK$2,000,000 | |
|---|---|---|
| Corporations | 8.25% | 16.5% |
| Unincorporated businesses (partnerships, sole proprietorships) | 7.5% | 15% |
The most a corporation can save compared with the flat rate is HK$165,000 a year (HK$2,000,000 × 8.25%).
Worked examples
These are our own calculations using the IRD's rates, before any one-off reduction.
| Example | Calculation | Tax (HK$) |
|---|---|---|
| 1. Company, assessable profits HK$1,500,000, no connected entities | 1,500,000 × 8.25% | 123,750 |
| 2. Company, assessable profits HK$3,000,000, no connected entities | 2,000,000 × 8.25% = 165,000; 1,000,000 × 16.5% = 165,000 | 330,000 |
| 3. Sole proprietorship, assessable profits HK$800,000 | 800,000 × 7.5% | 60,000 |
| 4. Company, assessable profits HK$1,500,000, and a connected entity has elected the two-tiered rates | 1,500,000 × 16.5% | 247,500 |
Example 4 matches the IRD's own illustration: a corporation whose connected entity is charged at the two-tiered rates pays 16.5% on all its profits.
The 2025/26 one-off reduction
Profits tax for the year of assessment 2025/26 is reduced by 100%, capped at HK$3,000 per case. The legislation was gazetted on 22 May 2026. In example 1, final tax would be HK$123,750 − HK$3,000 = HK$120,750. In example 3, HK$60,000 − HK$3,000 = HK$57,000.
Connected entities
- Two entities are connected if one controls the other, both are controlled by the same entity, or they are sole proprietorships of the same person.
- Control generally means owning or controlling, directly or indirectly, more than 50% of the issued share capital or voting rights, or being entitled to more than 50% of the capital or profits.
- The nominated entity elects by declaring it in its profits tax return (or the owner's individual tax return for a sole proprietorship). The election is irrevocable for that year, but a different connected entity can elect in a different year.
- If a business has no connected entity, it simply declares in its return that it is chargeable at the two-tiered rates.
- Heavy penalties may be imposed for an incorrect return without reasonable excuse, and the IRD will raise additional assessments.
Related service: Accounting & Bookkeeping (From HK$1,000 / year). We can handle this for you, and the first consultation is free.
Frequently asked questions
Do I need to apply for the two-tiered rates?
No separate application is needed. You declare in your profits tax return that the business is chargeable at the two-tiered rates, confirming it has no connected entity or that no other connected entity has elected for that year.
Can two companies owned by the same person both use the lower rate?
No. If the same person controls both, they are connected entities and only one of them can elect the two-tiered rates for a given year of assessment.
What rate does a sole proprietorship pay?
7.5% on the first HK$2 million of assessable profits and 15% on the rest. If one person owns several sole proprietorships, only one of them can elect the two-tiered rates.
Sources (official)
- IRD FAQ: Two-tiered profits tax rates regime
- IRD FAQ: Illustrative examples of the two-tiered profits tax rates
- IRD: Profits Tax
- IRD: 2026-27 Budget – Tax Measures
This guide is general information, not professional advice. Government fees and deadlines can change, so check the official sources linked above.