Hong Kong Profits Tax: The Two-Tiered 8.25% Rate Explained

Hong Kong's two-tiered profits tax charges a corporation 8.25% on the first HK$2,000,000 of assessable profits and 16.5% on the rest. Unincorporated businesses pay 7.5% and 15%. The lower tier is worth up to HK$165,000 a year to a company, but it is not automatic: within a group of connected entities, only one may elect it each year, on the tax return. Separately, the 2026-27 Budget waives 100% of final profits tax for the year of assessment 2025/26, capped at HK$3,000 per business.

Last reviewed: September 2026 · Sources: IRD, Inland Revenue Ordinance (Cap. 112), GovHK press releases

The rates at a glance

The two-tiered system has applied since the year of assessment 2018/19. The standard rates themselves have not changed since 2008/09, and no change was announced in the 2026-27 Budget, so the same figures govern the 2026/27 year of assessment. The IRD's profits tax page sets them out.

The saving is simply the HK$2,000,000 band taxed at half rate. A company earning HK$2,000,000 × (16.5% − 8.25%) saves HK$165,000; an unincorporated business saves HK$2,000,000 × (15% − 7.5%) = HK$150,000. Below HK$2,000,000 of profit, the saving is proportionally smaller.

What "assessable profits" means

Hong Kong taxes on a territorial basis. Only profits arising in or derived from Hong Kong, from a trade, profession or business carried on here, are chargeable. There is no capital gains tax, and dividends are not taxable.

Assessable profits are not the same as the profit in your accounts. The tax computation starts from accounting profit and then:

• adds back items the Ordinance does not allow, such as accounting depreciation, private expenses, fines and general provisions;
• deducts capital allowances in place of depreciation;
• removes non-taxable income, such as offshore profits (if claimed and supported) and capital gains;
• sets off tax losses brought forward from earlier years.

The two-tiered rates apply to the figure left at the end. Which expenses survive the adjustment is covered in our tax-deductible expenses checklist.

Worked example: a company with HK$3,000,000 of profit

A corporation has assessable profits of HK$3,000,000 and has elected the two-tiered rates.

1. First HK$2,000,000 × 8.25% = HK$165,000
2. Remaining HK$1,000,000 × 16.5% = HK$165,000
3. Total profits tax = HK$330,000

At the flat 16.5% on the whole amount, the bill would be HK$3,000,000 × 16.5% = HK$495,000. The election saves HK$165,000, the full value of the lower tier.

The same HK$3,000,000 earned by a sole proprietorship works out as HK$2,000,000 × 7.5% = HK$150,000, plus HK$1,000,000 × 15% = HK$150,000, a total of HK$300,000.

The connected-entity rule

This is where most errors occur, and where older guidance — including an earlier version of this article — goes wrong. The lower tier is not applied automatically. Each entity that wants it must elect it on its profits tax return, and within a connected group only one entity may do so for any year of assessment.

Under the IRD's two-tiered rates FAQ, two entities are connected when:

• one controls the other;
• both are under the control of the same entity; or
• they are businesses carried on by the same sole proprietor.

"Control" broadly means holding, directly or indirectly, more than 50% of the issued share capital, the voting rights, or the right to capital or profits.

How the election works on the return

The election is made in the profits tax return itself, and it is irrevocable for that year. A different entity in the group may elect in a later year. The entity that elects must also list every connected entity, with names and business registration numbers, in supplementary form S1, which is filed electronically. The BIR51 notes and instructions explain that S1 is not needed where there is no connected entity, or where a member of the group is listed.

Choosing which entity elects

Pick the entity whose profits are most likely to reach HK$2,000,000. Any unused part of the lower band is simply lost; it cannot be passed to another group company.

Consider a group with Company A (assessable profits HK$2,500,000) and Company B (HK$600,000).

Letting the wrong company elect costs this group HK$115,500 in a single year. Because the election is made company by company, return by return, groups where the companies file on different timetables need to agree the choice before the first return goes in.

Watching several companies' numbers at once? JetFlow's finance module keeps the ledger, invoicing and bank reconciliation current through the year, with a live P&L and trial balance, so you know which entity is heading past HK$2,000,000 before anyone signs a return. See how JetFlow handles month-end reporting.

The one-off reduction for 2025/26

The 2026-27 Budget waived 100% of final profits tax for the year of assessment 2025/26, capped at HK$3,000 per case. The Legislative Council passed the enabling bill on 13 May 2026 and it was gazetted on 22 May 2026. According to the IRD's 2026-27 Budget FAQ, the reduction appears in the final assessment for 2025/26, not in provisional tax. Any provisional tax overpaid as a result is refunded or set against other tax due.

Two quick illustrations:

• A company whose 2025/26 profits tax is HK$30,000 pays HK$27,000.
• A sole proprietor whose 2025/26 tax is HK$2,400 pays nil; the unused HK$600 is not carried forward.

The cap is modest, and it has moved from year to year: HK$20,000 for 2019/20, HK$10,000 for 2020/21 and 2021/22, HK$6,000 for 2022/23, HK$3,000 for 2023/24 and HK$1,500 for 2024/25. No reduction has been announced for 2026/27. Any such relief would come in the 2027-28 Budget, so do not assume it when budgeting cash for next year's bill.

Provisional tax and holding it over

Alongside each final assessment, the IRD raises provisional tax for the following year, based on the profits just assessed. Provisional tax is a prepayment, not an extra tax. It is credited first against the final tax for the year it relates to, and any excess is set against the next provisional tax or refunded. The demand note sets out two instalment dates and amounts.

If you expect profits for the current year to fall below 90% of the previous year's, you can apply to hold over some or all of the provisional tax. The IRD's holdover FAQ sets the deadline as the later of 28 days before the due date or 14 days after the notice of assessment is issued. Apply in writing, using form IR1121, or through eTAX, with a projection of current-year profits to support the claim.

Late payment carries a surcharge of 5% on the tax in default. If the tax, including that surcharge, is still unpaid six months after the due date, a further 10% is added.

Where the election sits in your filing year

For companies, the return is Form BIR51, issued in bulk on the first working day of April. The two-tiered election, the connected-entity declaration and form S1 all travel with it. The timetable, block-extension codes and supporting documents are in our BIR51 filing guide, and the dates sit alongside every other statutory deadline in the Hong Kong SME compliance calendar.

Common mistakes

• Assuming the lower rate applies by itself. It must be elected on the return, and a missing election is taxed at the standard rate.
• Two group companies both electing. Only one election can stand, and the others will be assessed at the standard rates — often after the tax has already been budgeted at the lower figure.
• Leaving S1 off. An electing entity with connected entities must file the supplementary form electronically, even when the main return is on paper.
• Electing the smaller company out of habit. Run the numbers each year; a group's profit mix changes.
• Treating accounting profit as assessable profit. Add-backs and capital allowances can move the figure by a wide margin.
• Budgeting for a tax reduction that has not been announced. The 2025/26 waiver does not extend to 2026/27.

Frequently asked questions

What is the profits tax rate in Hong Kong for 2026/27?

For corporations, 8.25% on the first HK$2,000,000 of assessable profits and 16.5% on the remainder. For unincorporated businesses, 7.5% and 15%. The 2026-27 Budget did not change these rates.

Is the 8.25% rate applied automatically?

No. The business must elect the two-tiered rates in its profits tax return, and the election is irrevocable for that year of assessment. Where there are connected entities, only one of them may elect, and it must list the others in form S1.

Can every company in my group use the HK$2 million lower tier?

No. Connected entities — broadly, companies under more-than-50% common control — share a single election each year. Nominate the one whose profits are most likely to use the full HK$2,000,000 band.

How much is the 2025/26 profits tax reduction?

100% of final profits tax for the year of assessment 2025/26, capped at HK$3,000 per business. It is given in the final assessment, not against provisional tax. Nothing has yet been announced for 2026/27.

Do sole proprietors pay 7.5% or 8.25%?

Sole proprietorships and partnerships pay 7.5% on the first HK$2,000,000 and 15% above that. The 8.25% and 16.5% rates are for corporations. A sole proprietor with several businesses is treated as having connected entities, so only one of them can take the lower tier.

Can I reduce my provisional tax if profits have fallen?

Yes, if you expect this year's profits to be less than 90% of last year's. Apply to hold over, in writing on form IR1121 or through eTAX, no later than 28 days before the due date, or 14 days after the notice was issued if that is later.

Key takeaways

• Corporations pay 8.25% on the first HK$2,000,000 and 16.5% above; unincorporated businesses pay 7.5% / 15%.
• The lower tier must be elected on the return — it is not automatic, and only one connected entity may elect each year.
• The electing entity lists its connected entities in form S1, filed electronically.
• 2025/26 final profits tax is reduced by 100%, capped at HK$3,000; there is no announced reduction for 2026/27.
• Provisional tax can be held over if profits are expected to fall below 90% of last year's.

The two-tiered rates reward businesses that know their numbers before the return arrives. If your books close cleanly each month, choosing the electing entity is arithmetic rather than guesswork. Start free with JetFlow to keep your ledger, bank reconciliation and reports current all year.

This article is general information, not tax advice. Check your position with the IRD or a qualified tax adviser before acting.