How Do Hong Kong’s Two-Tiered Profits Tax Rates Work?
- Kristina Coluccia
- Feb 4
- 3 min read
Hong Kong is known for its competitive and straightforward tax system. One of the key features supporting businesses—especially startups and SMEs—is the two-tiered profits tax rate regime, which offers reduced tax rates on the first portion of a company’s profits.
In this article, we explain how the two-tiered profits tax system works in Hong Kong, who qualifies, and how to take advantage of this business-friendly policy.
What Is the Two-Tiered Profits Tax System?
Introduced in 2018, Hong Kong’s two-tiered tax regime was designed to reduce the tax burden on smaller businesses and encourage entrepreneurship. It applies to both:
Corporations (e.g. private limited companies)
Unincorporated businesses (e.g. sole proprietorships and partnerships)
The system splits assessable profits into two portions:
First HK$2 million of profits – taxed at a reduced rate
Profits exceeding HK$2 million – taxed at the standard rate
What Are the Tax Rates?
For corporations:
8.25% on the first HK$2 million of assessable profits
16.5%Â on profits above HK$2 million
For unincorporated businesses:
7.5%Â on the first HK$2 million
15%Â on the remaining profits
This structure significantly reduces the effective tax rate for qualifying businesses, especially those in the early growth stage.
Who Is Eligible?
Most businesses incorporated in Hong Kong are eligible for the two-tiered rates, with some exceptions.
Only one entity within a corporate group can benefit from the reduced rate. If you operate a group of related companies, only one nominated entity can claim the lower tier—others will be taxed at the standard rate.
Entities engaged in regulated financial activities (such as banks or insurance companies) are excluded from the regime.
How Does It Work in Practice?
Let’s say your Hong Kong limited company earns HK$3.5 million in profits for the year.
Here’s how tax would be calculated:
First HK$2 million taxed at 8.25% = HK$165,000
Remaining HK$1.5 million taxed at 16.5% = HK$247,500
Total tax payable = HK$412,500
Under the previous flat 16.5% rate, tax on HK$3.5 million would have been HK$577,500—so the two-tiered system saves your business HK$165,000.
How to Apply for the Two-Tiered Rates
There’s no separate application form. When filing your Profits Tax Return, your accountant or tax representative will:
Indicate whether your company is claiming the two-tiered rates
Nominate the eligible entity (for corporate groups)
Ensure the appropriate tax calculations are included
Supporting documents such as audited financial statements must accompany the return.
Benefits of the Two-Tiered Tax System
Lower startup tax burden – great for new and growing businesses
More cash retained for reinvestment and operations
Supports SMEs and foreign-owned private companies
Encourages business formation and corporate structuring in Hong Kong
Maximize Your Tax Savings with Woodburn
Woodburn Accountants & Advisors helps companies navigate Hong Kong’s tax system to maximize tax efficiency and stay compliant. Our experienced team will:
Confirm your eligibility for the two-tiered profits tax rate
Prepare and file your annual Profits Tax Return
Structure your group companies to optimize tax position
Assist with audit, bookkeeping, and IRD correspondence
With Woodburn, you gain more than just tax support—you get a strategic partner focused on your long-term growth.
Contact Woodburn today to take full advantage of Hong Kong’s two-tiered profits tax system and keep more of your hard-earned profits.
Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.
Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.