Small and medium-sized enterprises in Hong Kong can look forward to more tax incentives as the government tries to counter competition from regional rivals offering lower rates. Though the city has been known for its business-friendly environment and low tax regime for decades, it is losing its competitive edge as the rest of the world is redrawing economic policies to attract more business.
To ensure the city stops losing young talent to regional rivals such as Singapore, South Korea and mainland China, new Chief Executive Carrie Lam Cheng Yuet-ngor has put tax reform on her agenda. Her administration is now in the process of formulating two tax policies that favours SMEs and start-ups.
The first is a two-tier profits tax system which will lower the rate for the first HK$2 million corporate profits to 10 per cent, from the current 16.5 per cent. The second proposal will offer additional tax deductions on expenses related to research and developments, as well as environmental protection, art and design initiatives. Last week, Lam told a group of business leaders that the new administration was making the final preparations to implement the policies.
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There are about 320,000 SMEs in Hong Kong, which represent 98 per cent of the city’s business establishment, and they employ 46 per cent of the total workforce in the private sector.
“We are very encouraged that the chief executive is giving this issue the attention it deserves. This will help create new job opportunities for all levels of employment and will encourage more to establish a business,” said Shirley Yuen, chief executive officer of the Hong Kong General Chamber of Commerce, the city’s largest business body.
While government officials like to use the city’s simple and low tax regime as a selling point to foreign investors, the tax rates for SMEs do not seem as low as many have imagined. In comparison, Singapore gives qualified start-ups a three-year tax exemption on the first S$100,000 (HK$574,000) and partial exemption of up to S$100,000 on the next S$200,000 of taxable income – on top of a flat rate of 17 per cent. In South Korea, SMEs enjoy a preferential corporate tax rate of as low as 7 per cent, while on mainland China, technology-advanced companies and firms registered in its many special economic zones can qualify for a reduced preferential corporate tax rate of 15 per cent.