Hong Kong’s chief executive announces new tax incentives

In her maiden Policy Address on 11 October, Hong Kong’s new Chief Executive Carrie Lam kept her election promise by announcing the introduction of a two-tier profits tax system to lower the tax burden on Hong Kong enterprises. She also announced a super tax deduction for qualifying research and development (R&D) expenditure.

The two-tier profits tax system to be introduced in Hong Kong will allow for the first HK$2 million of profits of all enterprises to be taxed at a reduced rate of 8.25%. Profits tax is currently levied at rate of 16.5% for companies carrying on business in Hong Kong on relevant income earned in or derived from Hong Kong.

To address potential abuse, anti-avoidance measures will prevent groups from setting up numerous enterprises and splitting their businesses to enjoy multiple entitlements at the reduced rate.

Lam further announced that a 300% tax deduction will be offered for the first HK$2 million of qualifying R&D expenditure incurred by enterprises; a 200% tax deduction will be available for the remaining expenditure.

The details of the super R&D deduction regime, including the qualifying criteria, the application procedures and the eligibility assessment, have yet to be announced. A press release of the Inland Revenue Department noted that a bill to implement the two initiatives would be submitted to the Legislative Council as soon as possible.

In addition to the super tax deduction, non-tax measures for supporting Innovation & Technology (I&T) development in Hong Kong, such as providing investment funding for I&T start-ups and nurturing young talent in the I&T field, were also mentioned in the Policy Address.

Lam also noted that Hong Kong would actively seek to sign more comprehensive tax treaties with other economies. These developments suggest that the Hong Kong government is adopting a proactive approach to promoting policy goals through tax measures.

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