Hong Kong Profits Tax Explained: The Two-Tiered System and How Much You’ll Actually Pay

An eligible Hong Kong corporation pays 8.25% Profits Tax on its first HKD 2 million of assessable profits and 16.5% on the amount above that threshold. For the 2025/26 year of assessment, final Profits Tax also receives a one-off 100% reduction capped at HKD 3,000 per case. For Profits Tax, IRD applies that ceiling to each business.

Those headline rates are only the starting point. The amount your company ultimately pays depends on assessable profits, eligibility, connected entities, source rules, annual concessions and provisional tax. Larger multinational groups may also need to consider FSIE and Pillar Two rules.

Hong Kong Profits Tax Rates for Corporations

The Hong Kong Inland Revenue Department has applied the two-tiered Profits Tax regime since the 2018/19 year of assessment. Eligible taxpayers receive a lower rate on the first HKD 2 million of assessable profits.

An eligible corporation therefore does not simply multiply all assessable profits by 16.5%. The lower tier is applied first to the portion within the HKD 2 million threshold.

If you are still evaluating the jurisdiction itself, our guide on why businesses continue to consider Hong Kong in 2026 provides the broader commercial context.

Not Every Corporation Automatically Qualifies for the Two-Tiered Rates

The regime is broadly available, but eligibility still needs to be checked. The connected-entity restriction is not the only situation that can take a corporation outside the lower tier.

IRD states that corporations making certain elections for concessionary tax treatment under the Inland Revenue Ordinance do not qualify for the two-tiered rates for that year of assessment. Examples include qualifying insurance businesses, corporate treasury centres, aircraft leasing businesses and certain ship leasing activities.

For an overseas founder, the practical point is simple: do not assume that every Hong Kong company starts with an 8.25% rate. The business activity and any special tax regime in use need to be reviewed first.

The HKD 2 Million Threshold Means Assessable Profit, Not Revenue

The threshold applies to assessable profits. It is not a turnover threshold and should not be treated like one.

A Hong Kong company with HKD 10 million in annual revenue does not automatically pay Profits Tax on HKD 10 million. The accounting result must first be adjusted under the applicable tax rules to arrive at assessable profits.

Some income and expenses can receive tax treatment that differs from their accounting presentation. That is why a calculator based only on revenue can give a misleading answer before the actual computation has even started.

How Much Hong Kong Profits Tax Will You Actually Pay?

For an eligible corporation with ordinary assessable profits, a simplified calculation applies 8.25% to the first HKD 2 million and 16.5% to the excess.

For 2025/26, final Profits Tax also receives a one-off 100% reduction capped at HKD 3,000. The relevant legislation was passed by the Legislative Council on May 13, 2026 and gazetted on May 22, 2026.

Table assumptions: the corporation qualifies for the two-tiered rates, all amounts are ordinary assessable profits, there is no loss set-off, concessionary rate, special tax treatment, foreign-source adjustment, tax credit or other adjustment, and the 2025/26 reduction is applied up to HKD 3,000.

At HKD 3 million of assessable profits, the first HKD 2 million generates HKD 165,000 of tax. The remaining HKD 1 million generates another HKD 165,000 at the 16.5% rate.

That produces statutory Profits Tax of HKD 330,000. After the HKD 3,000 one-off reduction for 2025/26, the simplified final tax becomes HKD 327,000.

The Lower Tier Can Be Worth Up to HKD 165,000 for Ordinary Profits

For a corporation with ordinary assessable profits that would otherwise be taxed at the normal 16.5% rate, the maximum rate benefit from the lower tier is HKD 165,000 per year of assessment before one-off reductions or other special treatments.

The calculation comes from the 8.25 percentage-point difference applied to the first HKD 2 million of assessable profits.

Once ordinary assessable profits exceed HKD 2 million, the additional amount is taxed at 16.5%. The effective rate then moves gradually closer to the normal rate as profits increase.

HKD 165,000 should not be treated as a universal saving for every taxpayer. Concessionary regimes, losses, tax credits and other treatments can change the outcome.

Connected Entities Change Who Can Use the Lower Tier

If an entity has one or more connected entities at the end of its basis period, the two-tiered rates can apply to only one nominated connected entity for that year of assessment.

The nominated entity makes the election through its tax return. The election is effective only where no other connected entity elects for the same year, and once made it is irrevocable for that year of assessment.

A different connected entity may be nominated in a later year if the relevant conditions are satisfied at that time.

What counts as a connected entity?

Broadly, two entities are connected when one controls the other or both are under the control of the same entity.

IRD’s control tests include ownership or control of more than 50% of issued share capital, more than 50% of voting rights, or entitlement to more than 50% of capital or profits. Special rules also apply where the same natural person carries on multiple sole proprietorship businesses.

Why the nomination can change the group’s tax calculation

Assume Corporation A has HKD 3 million of assessable profits and connected Corporation B has HKD 500,000. For simplicity, both have ordinary profits and no other relevant tax adjustments.

In this simplified example, nominating Corporation A reduces total group statutory tax by HKD 123,750 compared with nominating Corporation B.

Real group planning should not rely on profit size alone. Losses, concessionary regimes, source positions, credits and other tax attributes can change which outcome makes sense.

Is Foreign Profit Automatically Tax Free in Hong Kong?

No. Hong Kong follows the territorial source principle, but the location of a customer or the country shown on an invoice does not determine the source of profits by itself.

IRD focuses on the operations that produced the profit and where those operations were carried out. The actual commercial facts matter more than labels such as “foreign customer” or “overseas revenue”.

A Hong Kong company selling to customers in Indonesia, Europe or the United States therefore does not automatically qualify for 0% Profits Tax.

As a general territorial principle, profits genuinely sourced outside Hong Kong may fall outside the Profits Tax charge. However, specified foreign-sourced income received in Hong Kong by an MNE entity can still be deemed taxable under FSIE if the applicable exception or relief is not satisfied.

FSIE Adds a Separate Test for Certain Foreign-Sourced Income

The Foreign-sourced Income Exemption regime applies to specified foreign-sourced income accrued to and received in Hong Kong by an MNE entity, subject to its exceptions.

From January 1, 2023, the regime covered foreign-sourced interest, dividends, IP income and equity-interest disposal gains. From January 1, 2024, the disposal-gain scope was expanded to other types of property.

Specified foreign-sourced income received in Hong Kong can be deemed sourced in Hong Kong and brought into the Profits Tax charge where the relevant exception is not met.

Depending on the income, relevant exceptions or relief may include the economic substance requirement, participation requirement, nexus requirement or intra-group transfer relief.

For foreign founders, this distinction matters. Source analysis asks where the profit was produced. FSIE then asks whether specified foreign-sourced income received in Hong Kong falls within the deeming regime and whether an exception applies.

The HKD 3,000 Reduction for 2025/26 Is Temporary

Hong Kong applies a one-off 100% reduction to final Profits Tax for the 2025/26 year of assessment, subject to a ceiling of HKD 3,000 per case. For Profits Tax, IRD applies the ceiling to each business.

If final tax before the concession is HKD 2,000, the reduction can eliminate the full amount. If final tax is HKD 100,000, the maximum reduction remains HKD 3,000.

The measure does not change the underlying 8.25% and 16.5% statutory rates. It is specific to the 2025/26 year of assessment and should be checked again when projecting tax for later years.

Final Profits Tax and Provisional Profits Tax Are Different Numbers

The amount due on a tax assessment can be larger than one year’s final Profits Tax because Hong Kong also operates a provisional Profits Tax system.

IRD explains that the actual assessable profits for the current year cannot be finalized before the period has ended. A provisional amount can therefore be assessed based on profits available at that stage.

The relevant provisional tax is later credited against final liability and or a subsequent provisional liability. Where an excess balance remains after assessment, a refund mechanism can apply.

Provisional tax is therefore mainly a cash-timing issue. It should not be read as permanent double taxation of the same profit.

The HKD 3,000 reduction for 2025/26 applies to final tax only. Provisional Profits Tax remains payable according to the applicable assessment and payment schedule.

When Does Hong Kong’s 15% Global Minimum Tax Matter?

Pillar Two is not aimed at an ordinary startup or SME simply because it has incorporated in Hong Kong. The regime targets large multinational enterprise groups.

According to IRD, an in-scope MNE group generally has annual consolidated revenue of at least EUR 750 million in at least two of the four fiscal years immediately preceding the current fiscal year.

Hong Kong applies the Income Inclusion Rule and Hong Kong minimum top-up tax for fiscal years beginning on or after January 1, 2025.

For an in-scope MNE group, the normal 8.25% and 16.5% statutory rates are no longer the only numbers that matter. Pillar Two computes the effective tax rate on a jurisdictional basis under the GloBE rules.

Where the jurisdictional ETR is below the 15% minimum, a potential top-up tax is determined after relevant GloBE adjustments, the substance-based income exclusion and applicable safe harbours.

The 15% figure is therefore not a simple replacement of Hong Kong’s statutory Profits Tax rate with a 15% corporate tax rate. It is a minimum effective tax framework for in-scope multinational groups.

What to Check Before Estimating Hong Kong Profits Tax

A useful tax estimate needs more information than annual sales.

• Determine the accounting result and relevant basis period.
• Apply the tax adjustments needed to arrive at assessable profits.
• Check whether the business uses ordinary rates or a concessionary tax regime.
• Identify connected entities and the nominated entity where required.
• Analyse the source of profits based on the operations that actually produced the income.
• Review FSIE where an MNE entity receives specified foreign-sourced income in Hong Kong.
• Apply annual tax reductions only to the year of assessment for which they are available.
• Separate final liability from provisional tax when planning cash flow.
• Review Pillar Two only where the company belongs to an in-scope MNE group.

If you are still choosing the legal structure, our Hong Kong Private Limited Company guide explains the core requirements, documents and ongoing compliance obligations.

From a Tax Estimate to an Operational Hong Kong Company

A low headline tax rate is useful only when the company itself has been structured properly. Registered office, company secretary, accounting records and the compliance calendar all need to work together.

For founders who have not incorporated yet, our Hong Kong company registration service at vOffice provides a structured route through incorporation and the core statutory setup.

You can also review our guide on registering a Hong Kong company from abroad before deciding how you want to proceed.

Once the company starts trading, the tax result follows what the business actually does. Incorporating in Hong Kong alone does not create an automatic right to offshore treatment, the two-tiered rates or any particular tax outcome.