In her maiden Policy Address last Wednesday, Hong Kong’s Chief Executive, Carrie Lam, announced a two-tier profits tax system to lower the tax burden on Hong Kong enterprises. A super tax deduction for qualifying research and development (R&D) expenditure will be granted to boost the development of innovation and technology (I&T) in Hong Kong.
Keeping a promise made during the CE election campaign, 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%.
The Chief Executive also announced in the Policy Address 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.
In addition to the super tax deduction, non-tax measures for supporting 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.
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.
PwC welcomes the government’s initiative of strategically using tax measures as a tool to support the growth of targeted sectors/industries and promote economic diversification in 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.
“These new tax measures should be welcomed by taxpayers, with proper legislation and implementation details, they can serve their intended policy objectives and bring real benefits to businesses in Hong Kong,” says Agnes Wong, PwC Hong Kong Tax Partner.
“Hong Kong is a well-established financial hub that has huge opportunities in the Guangdong-Hong Kong-Macau Greater Bay Area. We believe substantive support from government will be essential for the business sector and Hong Kong’s economy as a whole.”
PwC Hong Kong Tax Partner Jeremy Choi says, “The business sector has asked for these sorts of tax incentives for several years. We believe the super R&D deduction regime could attract funds and talent to Hong Kong and boost the development of the I&T sectors.
“However, the HKSAR Government will need to carefully consider the scope of activities and expenditure that qualify for the deduction. The compliance burden for taxpayers, and whether any measures introduced will bring undue complexity or impracticality to taxpayers, also need to be considered.”