Hong Kong Profit Tax: A Must-Read For Business Owners

Navigating the world of taxes is a crucial responsibility for every business owner, particularly when operating in a global financial hub like Hong Kong. Understanding profit tax in Hong Kong can help business leaders manage tax obligations effectively and optimize financial performance.

In this comprehensive guide, we’ll break down everything you need to know about Hong Kong’s profit tax – from key definitions to tax calculation methods and even the incentives available for taxpayers.

Definition & principles of profit tax Hong Kong

Profit tax, or corporate income tax, is the primary tax imposed on companies incorporated in Hong Kong.

It applies annually to individuals engaged in trade, profession, or business in Hong Kong, based on their assessable profits generated within or from Hong Kong for that specific year, excluding profits from capital asset sales.

The profit tax is governed by the Inland Revenue Ordinance (IRO), which outlines the tax treatment, liabilities, and exemptions for taxpayers.

Two key principles underpin the structure of Hong Kong profit tax system – the two-tier tax principle and territorial principles.

Two-tier tax principle

The two-tier tax principle refers to the application of two different tax rates on assessable profits – a lower rate for the first HK$2 million and a standard rate for profits exceeding that amount.

This principle was put in place by the Hong Kong government in 2018 to reduce the tax burden on smaller businesses and promote entrepreneurship.

Under the two-tier principle, all corporations and unincorporated businesses are subject to the following Hong Kong profit tax rate:

Corporations

• 8.25% for the first assessable profits of HK$2 million.
• 16.5% for part of assessable profits above HK$2 million.

Unincorporated business (partnerships and sole proprietorship)

• 7.5% for the first assessable profits of HK$2 million.
• 15% for part of assessable profits above HK$2 million.

Territorial principle

The territorial principle means only the profits arising from the operations happening in Hong Kong are deemed taxable.

This principle guarantees that companies are only liable for taxes on the profits generated within Hong Kong’s borders, regardless of their residency status.

This policy makes Hong Kong an attractive location for businesses as it minimizes their tax obligations and provides a competitive edge over other countries with profit taxation schemes.

Profit tax fundamentals: Understanding the key terms

Before we dive into the details, it’s essential to grasp the terminologies and concepts related to profit tax Hong Kong.

Taxable profits

Under IRO, taxable profits include the following:

• Trading profits
• Professional fees
• Business income

In contrast, non-taxable profits in Hong Kong may include:

• Capital gains on the sale of capital assets (shares, properties)
• Dividend income from tax-exempt sources
• Income from qualifying debt instruments

Assessable profits

Assessable profits refer to the net profit that is eligible for taxation. It is calculated by subtracting allowable deductions from taxable profits.

Allowable deductions are expenses that businesses can deduct from their assessable profits to reduce the taxable amount. These include:

• Business or trade expenses incurred during the production of income
• Depreciation of assets used for business operations
• Donations made to approved charitable organizations

Tax payable

This term indicates the net amount of tax a company owes to the government after deducting any tax credits, allowances, or relief.

In other words, it is the final tax liability that a business must pay based on its assessable profits and applicable tax rates.

How to calculate Hong Kong’s profit tax?

Understanding how to calculate your profit tax is crucial for accuracy and compliance. To help you better grasp the profit tax computation, let’s go through a scenario involving the company ABC Electronics with us.

Step 1: Determine taxable profits

The first step is to determine the taxable profits from trade, profession, or business operations in Hong Kong.

Let’s say ABC Electronic with taxable profits of HK$5 million for the fiscal year 2022/2023, comprising:

• HK$3 million from selling electronic products in Hong Kong.
• HK$2 million from exporting products to China.

In this case, ABC Electronic is responsible for paying Hong Kong profit tax on the HK$3 million generated from local sales in Hong Kong.

Step 2: Calculate assessable profits

Once you have determined your taxable profits, the next step is to calculate the assessable profits by deducting any allowable deductions from the taxable profit.

In our scenario with ABC Electronic, the company has various business-related expenses such as employee salaries, rent, utilities, and cost of goods sold, which total HK$500,000.

These are allowable deductions, so we subtract them from the taxable profits to determine the assessable profits, which are:

Assessable profits = Taxable profit – Allowable deduction – Loss (if any)

= HK$3,000,000 – HK$500,000

= HK$2,500,000

Therefore, ABC Electronics’ assessable profits amount to HK$2,500,000. This figure will be used to calculate the company’s profit tax payable.

Step 3: Calculate the profit tax payable

Now that we have determined the assessable profits, it is time to calculate the final tax liability, which is profit tax payable.

You’ll need to apply the two-tier tax rate at this point.

• For the first HK$2 million of assessable profits, the tax rate is 8.25% (for corporations) or 7.5% (for unincorporated businesses).
• For any amount above HK$2 million of assessable profits, the tax rate is 16.5% (for corporations) or 15% (for unincorporated businesses).

Using this information, we can calculate ABC Electronics’ profit tax payable as follows:

Profit tax payable = (Assessable profits up to HK$2 million x 8.25%) + (Assessable profits above HK$2 million x 16.5%)

= (HK$2,000,000 x 8.25%) + (HK$500,000 x 16.5%)

= HK$165,000 + HK$82,500

= HK$247,500

ABC Electronics’ profit tax payable is HK$247,500. This figure represents the final amount that the company must pay in taxes to the Hong Kong IRD.

Profit tax obligations for businesses in Hong Kong

The Hong Kong tax system imposes several obligations on businesses to uphold the integrity of the tax regime. Accordingly, companies are required to fulfill annual compliance requirements, including but not limited to the following:

• Paying provisional tax
• Filing profit tax returns
• Submitting audited accounts

Paying provisional tax

Companies in Hong Kong are mandated to pay provisional profit tax, an estimated tax for the upcoming year based on the previous year’s assessable profits. This tax is paid in two installments: 75% and 25%.

Once the actual profits are calculated, there may be adjustments made. Any excess from the provisional tax can be applied to the next year or refunded, while any shortfall must be paid.

This approach helps taxpayers spread their tax payments over the year, which can aid in financial planning and cash flow management.

Let’s say ABC Electronic made HK$2,500,000 in assessable profits for the tax year 2022/2023. This means that ABC Electronic would need to pay a provisional tax of HK$247,500 for the year 2023/2024, based on its assessable profits from the previous year, in two installments:

• First installment: HK$185,625 (75% of the provisional tax)
• Second installment: HK$61,875 (remaining 25% of the provisional tax)

If the actual profits for 2023/2024 turn out to be less than the assessable profits (e.g., HK$2,200,000), the excess from the provisional tax can either be applied to reduce the provisional tax liability for next year (2024/2025) or refunded to ABC Electronics.

If the actual profits for 2023/2024 turn out to be more than the assessable profits (e.g., HK$3,000,000), the company would have to pay extra to cover the shortfall.

The deadline for provisional tax payments is set by the Commissioner of IRD and specified in the assessment notice issued by the IRD.

Filing profit tax return

In addition to provisional tax payments, companies in Hong Kong are required to file annual profit tax returns (PTR) with the IRD, which include the following:

• Profit Tax Return – Form BIR51 (for corporations)
• Profit Tax Return – Form BIR52 (for persons other than corporations)
• Profit Tax Return – Form BIR54 (for non-resident persons)

The IRD typically issues these returns on the first working day of April each year.

• For newly registered businesses: the first PTR must be filed within 18 months from the incorporation date, and then every 12 months after the initial tax return.
• For continuing business: PTR must be submitted to IRD within 1 month from the issuance date.

Failing to file a company tax return by the due date may incur a penalty or prosecution.

Submitting audited accounts

Companies must provide audited accounts alongside their Hong Kong profit tax return to the IRD. These audited accounts consist of the following:

• Company’s Balance Sheet: This document presents the company’s financial position at a particular point in time, giving details about its assets, liabilities, and shareholders’ equity
• Company’s Profit and Loss Account for the basis period: This document displays the revenues, costs, expenses (including taxes), and net profit or loss over a period of time.
• An auditor’s report: This is the formal opinion or disclaimer issued by an auditor as a result of an audit or evaluation of a company’s financial statements. The auditor must be a certified public accountant (CPA) who is registered with the Hong Kong Institute of Certified Public Accountants (HKICPA).

Profit tax exemption and incentives in Hong Kong

Hong Kong offers several tax incentives and exemptions to attract foreign investment and foster economic growth. Below are some of the most common ones to take note of.

Tax exemption

According to territorial principle, companies incorporated in Hong Kong are only subject to taxes on their local income, others derived from outside sources are exempt.

This tax exemption is not granted automatically, but only after an investigation made by the Inland Revenue Department (IRD).

Under the rule set by the IRD, companies can file for an offshore income claim and receive the offshore status for tax exemption if the following criteria are met:

• The company has no economic substance in Hong Kong, meaning it does not employ any staff or have a physical office in the city; and
• The company’s investors and directors are not based in Hong Kong.

It’s important to note that the request for offshore status needs to be resubmitted annually. Even if the company receives offshore status from IRD, it will still need to maintain accounting records and comply with the auditing requirement.

Tax incentives

To make Hong Kong a more attractive business hub, the local authorities have created various incentives as follows:

Write-off expenses

Hong Kong offers a 100% write-off for expenses from purchasing machinery, mainly related to manufacturing, computer hardware, and software.

Profit tax deduction

• 100% deduction for expenditure on environmentally friendly machinery and equipment in the year of purchase.
• 100% deduction for expenditure related to environmental protection installations in the year the expenditure is incurred.
• Deduction for expenditure related to the sale of intellectual property, such as patents, copyrights, performance rights, and more.
• Enhanced deduction for qualifying expenditure related to research and development (R&D) activities.

Tax exemption

• Tax exemption is granted to Hong Kong-operated funds for asset transactions under specific conditions, irrespective of their structure, size, purpose, or management location.
• Tax exemption for gains from qualified debt instruments, depending on the nature of instruments and other factors

Concessionary tax rate

• 0% for carried interest.
• 0% for FIHV (Family-owned Investment Holding Vehicles) managed by an ESFO (Exempted Single Family Office).
• 8.25% for corporate treasury centers, insurance-related businesses, and aircraft leasing businesses.
• 0% or 8.5% for qualifying ship lessors and ship leasing manager

Final thoughts

As the business landscape in Hong Kong continues to evolve, tax literacy and strategic tax management will be vital components in the success and sustainability of enterprises.

For business owners and entrepreneurs, mastering the complexities of profit tax Hong Kong is a direct investment in your company’s future. It paves the way for sustainable growth, competitive advantage, and peace of mind in an ever-changing economic environment.

If you ever need help with filing your Profit Tax Return or obtaining offshore status for tax exemption in Hong Kong, feel free to reach out to our team at service@bbcincorp.com for practical support.

Share this article