Hong Kong’s Two-Tiered Profits Tax: How the 8.25% Rate Actually Works

A discount every company must ask for, capped once per group

The mechanics are simple for a standalone company. A company with HK$3 million of assessable profits pays 8.25% on the first HK$2 million (HK$165,000) and 16.5% on the remaining HK$1 million (HK$165,000), for total tax of HK$330,000 — against HK$495,000 if the full amount were taxed at the standard 16.5% rate. That’s the maximum the two-tiered regime can save any single corporation: HK$165,000 a year (HK$150,000 for an unincorporated business). What catches companies out is that the discount isn’t automatic just because a company qualifies for it. Inland Revenue Department guidance confirms that even a company with no connected entities has to declare in its Profits Tax Return that it is chargeable at the two-tiered rates.

The one-per-group cap is where it gets stricter. Two entities are “connected” if one holds, directly or indirectly, more than 50% of the other’s shares, voting rights or entitlement to profits, or if both are held that way by the same parent or individual. That definition catches sister companies under common ownership even when neither holds shares in the other, and it treats a sole proprietor’s separate unincorporated businesses as connected to each other too. Only one entity in that connected group may elect the two-tiered rates for a given year; every other connected entity pays the standard 16.5% (or 15%, for unincorporated businesses) on the whole of its profits that year, not just the amount above HK$2 million.

The nominated entity makes the election by declaring, in its own Profits Tax Return, that it is chargeable at the two-tiered rates and that no other connected entity has elected the same treatment for that year. Once filed, that election is irrevocable for the year of assessment it covers — but it isn’t a permanent choice for the group. A different connected entity can be nominated in a later year’s return, which is worth revisiting whenever profits shift between group companies, since the saving is only worth the full HK$165,000 if the nominated entity actually earns at least HK$2 million that year.

For a group with several Hong Kong entities, VIVOS Corporate Services (HK) Ltd. reviews profit forecasts across the group before each return is due, so the election lands on the entity that will actually use it in full, and is filed correctly and on time.

Where the new global minimum tax fits in

Hong Kong’s Pillar Two rules — the Income Inclusion Rule and the Hong Kong Minimum Top-up Tax — apply to fiscal years beginning on or after 1 January 2025, but only to multinational enterprise groups with annual consolidated revenue of EUR 750 million or more in at least two of the four preceding fiscal years. For every other Hong Kong business, Pillar Two does not apply, and profits tax is charged at the rates above.

How much profits tax on HK$3.5 million? A worked example for 2025/26

A nominated Hong Kong corporation with HK$3.5 million of assessable profits for 2025/26 owes HK$412,500 at the two-tiered rates, an effective rate of about 11.8%, against HK$577,500 at a flat 16.5%. After the one-off 2025/26 reduction of up to HK$3,000, it pays HK$409,500.

1. First HK$2,000,000 × 8.25% = HK$165,000.
2. Remaining HK$1,500,000 × 16.5% = HK$247,500.
3. Total: HK$165,000 + HK$247,500 = HK$412,500; effective rate HK$412,500 ÷ HK$3,500,000 = 11.8%.
4. Without a valid election, as a connected company not nominated: HK$3,500,000 × 16.5% = HK$577,500, or HK$165,000 more.
5. 2025/26 reduction of 100% of final tax, capped at HK$3,000 per case: HK$412,500 − HK$3,000 = HK$409,500.
6. Provisional tax for 2026/27 on the same profits: HK$412,500 at the two-tiered rates; the reduction does not apply to it.
7. In a partnership of individuals: HK$150,000 at 7.5% + HK$225,000 at 15% = HK$375,000, against HK$525,000 at a flat 15%, a saving of HK$150,000.

Shortcut above HK$2 million: tax = profits × 16.5% − HK$165,000. Assumes no losses brought forward.

Which connected company should elect? Comparing the options

A group should nominate the company with the highest assessable profits up to HK$2 million, because the saving equals 8.25% of the nominee’s profits up to that threshold. Here, two Hong Kong companies owned by the same parent earn HK$1.2 million (A) and HK$4 million (B) for 2025/26.

Option	Company A tax	Company B tax	Group tax
A elects	HK$99,000	HK$660,000	HK$759,000
B elects	HK$198,000	HK$495,000	HK$693,000
Both elect, or neither	HK$198,000	HK$660,000	HK$858,000

Nominating B saves HK$66,000 more than nominating A, and HK$165,000 against no valid election. Each company then gets its own 2025/26 reduction of up to HK$3,000, so the best case is HK$687,000.

How the two-tiered rates apply to partnerships, sole proprietors and special regimes

Any entity chargeable to profits tax can use the two-tiered rates, subject to these special rules.

Situation	How the two-tiered rates apply
Partnership with a corporate partner	The HK$2 million is split by profit-sharing ratio: a 20% corporate partner gets HK$400,000 at 8.25%, the individual partners HK$1.6 million at 7.5%
Individual with two or more sole proprietorships	Each business is a separate, connected entity; only one can elect
Half-rate profits from qualifying debt instruments	The two-tiered rates still apply to normal trading profits
Corporation on a concessionary regime (insurance, insurance brokerage, corporate treasury centre, aircraft or ship leasing)	Not eligible; it answers “No” at Item 2.3 of BIR51
Non-resident taxed in a Hong Kong payer’s name, for example on royalties	The payer may declare the election if no connected entity elects; the lower-rate portion is capped at HK$2 million across all payers

How to claim the two-tiered rates in a 2025/26 return, step by step

A corporation claims the two-tiered rates by answering “Yes” at Item 2.3 of its profits tax return (BIR51) and, where it has connected entities in Hong Kong, filing Supplementary Form S1.

1. List every entity connected with the company at the end of the basis period, applying the more-than-50% control test directly and indirectly.
2. Remove any corporation on a concessionary regime, such as a corporate treasury centre; it cannot elect.
3. Forecast each remaining entity’s assessable profits and choose the one with the highest profits up to HK$2 million.
4. Record the group decision so that only the nominee answers “Yes” at Item 2.3 and every other connected entity answers “No”.
5. If the nominee has positive assessable profits and connected entities carrying on business in Hong Kong, tick Item 9.1 and file Form S1 with each one’s name and Business Registration number, unless a connected entity is listed on the Stock Exchange of Hong Kong.
6. File BIR51 with the audited financial statements and tax computation by the due date: 16 November 2026 for a 31 March 2026 year-end under the block extension scheme.
7. Check that the notice of assessment applies 8.25% to the first HK$2 million and the HK$3,000 reduction; if not, object in writing within one month after its date of issue.

Two-tiered profits tax: key dates from 2018 to 2027

The two-tiered rates have not changed since 1 April 2018. What changed in 2025–2026 is the one-off reduction, the 2025/26 filing dates and the global minimum tax for the largest groups.

Date	What happened or is due
1 April 2018	Two-tiered rates apply from the 2018/19 year of assessment
Year of assessment 2024/25	100% reduction of final profits tax, capped at HK$1,500 per case
1 January 2025	Pillar Two (IIR and HKMTT) applies to fiscal years starting on or after this date
25 February 2026	2026-27 Budget proposes a 100% reduction of 2025/26 final profits tax, capped at HK$3,000
1 April 2026	2025/26 profits tax returns issued in bulk
4 May 2026	“N” code returns due (year-ends 1 April to 30 November 2025), paper filing
13 May 2026	Legislative Council passes the 2025/26 reduction (gazetted 22 May 2026)
31 August 2026	“D” code returns due on paper (December 2025 year-ends), after the IRD extension of 14 July 2026; 2 October 2026 if e-filed
16 November 2026	“M” code returns due (year-ends 1 January to 31 March 2026)
1 February 2027	“M” code returns with an allowable loss for 2025/26

Block extension dates apply to returns lodged by a tax representative; e-filing can add a further month on application.

Common two-tiered profits tax mistakes

Most lost savings come from electing in the wrong company, or in more than one.

• Two connected companies both answering “Yes”: neither election is effective, so both pay 16.5% on all their profits.
• Treating sister companies as unconnected because neither owns the other: control by the same individual or parent connects them.
• Missing indirect control through an intermediate holding company, including one outside Hong Kong.
• Ignoring a company acquired before the year-end: connected status is tested at the end of the basis period.
• Nominating a loss-making or low-profit company, wasting the saving.
• Applying to hold over provisional tax because the two-tiered rates will apply: that ground was available only for 2018/19.

Two-tiered profits tax terms explained

These terms appear in the IRD’s guidance and on the profits tax return.

• Basis period: the accounting period assessed for a year of assessment; connected status is tested at its end.
• Entity: a natural person, a body of persons, or a legal arrangement such as a corporation, partnership or trust.
• Control: owning or controlling, directly or indirectly, more than 50% of an entity’s issued share capital, voting rights, or capital or profits.
• Connected entity: an entity that controls another, is controlled by it, or is under the same control.
• Supplementary Form S1: the form an electing company files to list its connected entities carrying on business in Hong Kong.