Two-Tiered Profits Tax in Hong Kong: Complete Guide (2026)

Is Your Hong Kong Business Paying More Tax Than It Should?

Since the 2018/19 year of assessment, eligible Hong Kong businesses have been entitled to pay profits tax at half the standard rate on their first HKD 2 million of assessable profits. For a corporation, that means 8.25% instead of 16.5% on the first HKD 2 million, generating a maximum annual tax saving of HKD 165,000.

Despite being in place for several years, some business owners are still unclear on who qualifies, how the election works, and what the "connected persons" restriction means for groups of related companies. This guide covers everything you need to know to make the most of Hong Kong's two-tiered profits tax regime in 2026.

Key Highlights

• The two-tiered regime was introduced by the Inland Revenue (Amendment) (No. 7) Ordinance 2018, effective from the year of assessment 2018/19
• First HKD 2 million of assessable profits is taxed at 8.25% for corporations (or 7.5% for unincorporated businesses)
• Profits above HKD 2 million continue to be taxed at the standard rate of 16.5% (corporations) or 15% (unincorporated)
• The maximum tax saving is HKD 165,000 per year for a corporation
• Only ONE entity in a group of "connected persons" can benefit from the reduced rate
• No separate election form is needed for most businesses. The reduced rate applies automatically

Hong Kong's Standard Profits Tax Rates

Before understanding the two-tiered regime, it helps to be clear on the underlying standard rates. Hong Kong operates a territorial tax system: only profits sourced in or derived from Hong Kong are subject to profits tax. There is no tax on foreign-sourced income, capital gains, or dividends.

For a thorough grounding in how profits tax works in Hong Kong, including what counts as assessable profits and what deductions are permitted, see our complete guide to Hong Kong profits tax.

How the Two-Tiered Rate Works

The mechanics are straightforward. Your total assessable profits for the year of assessment are split at the HKD 2 million threshold:

• The first HKD 2 million is taxed at the reduced rate (8.25% for corporations)
• The remainder (if any) is taxed at the standard rate (16.5% for corporations)

The assessable profits figure is after deducting all allowable expenses, depreciation allowances, and losses. Only the net assessable profits are subject to tax, and the two-tiered split applies to that net figure.

Worked Example: Corporation with HKD 5 Million Assessable Profits

Under the old flat-rate regime (16.5% on all HKD 5 million), the tax would have been HKD 825,000. The two-tiered regime saves this company HKD 165,000 per year.