Under Hong Kong's two-tiered profits tax regime, a corporation pays 8.25% on assessable profits up to HK$2,000,000 and 16.5% on any part above that, while an unincorporated business pays 7.5% and 15% on the same two bands (Inland Revenue Department, "Profits Tax", checked 2026-09-30). The lower band is not available to every related business in a group: where an entity has one or more connected entities at the end of the basis period, the two-tiered rates apply only to the one entity nominated to be chargeable at those rates, and the rest are taxed on all of their profits at 16.5% or 15% (IRD, "Q & A for Two-tiered Profits Tax Rates Regime", checked 2026-09-30).
What are the two-tiered rates?
The regime has applied since the 2018/19 year of assessment. The first HK$2,000,000 of assessable profits is taxed at half of the corresponding standard rate; profits above that are taxed at the standard rate.
| Entity | First HK$2,000,000 of assessable profits | Assessable profits above HK$2,000,000 |
|---|---|---|
| Corporation | 8.25% | 16.5% |
| Unincorporated business (sole proprietorship or partnership) | 7.5% | 15% |
The standard rates are 16.5% for corporations and 15% for unincorporated businesses. Source: IRD, "Profits Tax" (checked 2026-09-30).
Why can only one connected entity use the lower rate?
The rule is an anti-fragmentation rule rather than a sizing rule: the concession is meant to reach one entity, not every entity that a person or group controls. Under the IRD's Q&A, if at the end of the basis period the entity has one or more connected entities, the two-tiered profits tax rates apply only to the one that is nominated to be chargeable at the two-tiered rates. The other connected entities are charged on their entire assessable profits at the standard rate of 16.5% or 15%, with no lower band (IRD, "Q & A for Two-tiered Profits Tax Rates Regime", checked 2026-09-30).
In practice, the consequence is that the HK$2,000,000 band is a single allowance for the connected group, not a per-entity allowance. Splitting activity or profit across several entities does not multiply the band.
The same logic appears in the sole-proprietorship context: where a natural person owns two or more sole proprietorship businesses, each business is treated as a separate entity, and the application of the two-tiered rates is restricted to only one of those businesses — the one that has made an election (IRD, "Q & A for Two-tiered Profits Tax Rates Regime", checked 2026-09-30).
Two points are worth stating plainly, because they are easy to assume:
- The materials used here do not set out the full definition of "connected entity" beyond the nomination rule and the sole-proprietorship example above.
- Nothing in the sources consulted states that profits may be apportioned across connected entities to create additional lower-rate bands.
How does the 2025/26 one-off reduction fit in?
For the year of assessment 2025/26, profits tax, salaries tax and tax under personal assessment are reduced by 100%, subject to a ceiling of HK$3,000 per case. The relevant legislation was gazetted on 22 May 2026. Because profits tax is computed for each business, the ceiling applies per case rather than once for a group.
The reduction applies only to the final tax; it does not apply to provisional tax. Source: IRD, "2026-27 Budget – Tax Measures" (checked 2026-09-30).
The IRD's budget page does not state whether a comparable reduction will be available for 2026/27.
When does a newly registered business receive its first profits tax return?
A newly registered business will generally receive its first Profits Tax Return some 18 months after the date of commencement of business or the date of incorporation. The annual bulk issue of Profits Tax Returns takes place on the first working day of April each year, and a return with any required supplementary forms is generally due within one month from the date of issue. Source: GovHK / IRD, "Profits Tax Return and Supplementary Form to Profits Tax Return" (last revision July 2026; checked 2026-09-30).
The longer deadlines that apply to businesses with certain accounting-date codes (N, D, M and M3) are not set out in the materials used for this article.
How does a sole proprietorship report business profits?
A sole proprietorship business is reported in Part 5 of the individual tax return (BIR60). Where the gross income of the sole proprietorship business does not exceed HK$2,000,000, no financial statements need to be attached to the return — but the accounts must still be kept (IRD, "Tax Reporting for Profits Tax (Sole Proprietorship & Partnership)", checked 2026-09-30).
For a company, a separate obligation applies at the outset: a local company must notify the Business Registration Office of its business particulars within one month after commencement of business (IRD, "FAQ - One-stop Company and Business Registration Service", checked 2026-09-30).
FAQ
Can each connected entity claim the lower rate on its own first HK$2,000,000?
No. Where connected entities exist at the end of the basis period, only the entity nominated to be chargeable at the two-tiered rates uses the lower band; the others pay 16.5% (corporations) or 15% (unincorporated businesses) on all of their assessable profits, per the IRD's two-tiered rates Q&A (checked 2026-09-30).
If one person owns two sole proprietorships, do both get the 7.5% rate?
No. Each business is a separate entity, and the two-tiered rates are restricted to only one of the sole proprietorship businesses — the one that has made an election (IRD, checked 2026-09-30).
Does the 2025/26 reduction apply to provisional tax?
No. The 100% reduction, capped at HK$3,000 per case, applies only to the final tax; it does not apply to provisional tax (IRD, "2026-27 Budget – Tax Measures", checked 2026-09-30).
When will my new company get its first Profits Tax Return?
Generally about 18 months after the date of commencement of business or the date of incorporation (GovHK / IRD, checked 2026-09-30).
Do I need to attach financial statements to a sole proprietorship return?
If the business's gross income does not exceed HK$2,000,000, no financial statements need to be attached, though you must still keep the accounts (IRD, checked 2026-09-30).