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Hong Kong is world renowned for its simple and low tax regime, making it one of the most business-friendly jurisdictions in the world. This guide provides a detailed overview of income tax rates, corporate tax system, profits tax return, and tax incentives for Hong Kong companies.
Hong Kong’s corporate tax system, or profits tax as it commonly referred to, follows a territorial and flat-rate principle. Additionally, tax incentives have been introduced to increase Hong Kong’s competitiveness and strengthen its position as an investment destination in the Asia-Pacific region.
For a general overview of the overall tax system in Hong Kong, refer to Overview of Hong Kong’s Tax System.
To find out more about the company formation in Hong Kong.
To estimate your Hong Kong taxes and compare them with your home country, refer to Online Tax Calculator.
Hong Kong follows a territorial system of taxation. In other words, tax will be levied only on profits arising in or derived from carrying on a trade, business or profession in Hong Kong. Profits tax is not applicable to profits whose source is outside Hong Kong. Hence, if you carry on a business in Hong Kong but your profits are derived from elsewhere, you are not liable to pay profits tax, irrespective of whether the profits have been remitted to Hong Kong.
The territorial principle does not distinguish between residents and non-residents. You may be a resident in Hong Kong but if your profits are derived elsewhere, you are not liable to pay any tax on those profits. Likewise, if a non-resident derives profits from Hong Kong, he will be liable to pay profits tax in Hong Kong.
The questions of whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong are largely questions of fact. However some guidance on the principles applied can be found in cases which have been considered by the courts in Hong Kong and in other common law jurisdictions. Read more about Hong Kong corporate tax rate and profits tax rate below.
In Hong Kong, corporations have two options for Profit Tax Rates:
Single-Tier Corporate Tax System
TheSingle-Tier Corporate Tax System-corporations are taxed at 16.5% on assessable profits and unincorporated businesses are taxed at 15%.
Two-Tier Profits Tax Regime
The Two-Tier Profits Tax Regime applies to both corporations and unincorporated businesses by lowering the tax rate for the first $2 million of assessable profits.
The two-tier profits tax rates is effective from year of assessment 2018/19 (i.e., on a taxpayer’s financial year ending between 1 April 2018 and 31 March 2019) and it aims to significantly reduce the tax burden of most taxpaying small and medium-sized enterprises (SMEs).
Only one “entity” within a group of “connected entities” can enjoy the two-tier rates. For this purpose, the group will need to identify which entity will benefit and to make election accordingly.
Hong Kong Corporate Tax Rate: The applicable tax rates are as follows:
Tax Rate | ||
Assessable profits | Corporations | Unincorporated businesses |
First HK$2 million | 8.25% | 7.5% |
Over HK$2 million | 16.5% | 15% |
There is a one-off reduction of 75% of the profits tax for the year of assessment 2017/18, subject to a maximum of HKD 30,000 per case.
In order to avoid double benefits, the following enterprises shall be excluded from the two-tiered profits tax regime:
A concessionary tax rate at 50% of the normal profits tax rate will be applied to trading profits and interest income received or derived from qualifying debt instruments (QDIs) issued in Hong Kong, and to offshore business of professional reinsurance companies.
The profits from QDIs, which are already taxed at 8.25% or 7.5%, would not be counted towards the HK$2 million threshold for the purpose of applying the two-tier rates. That means businesses with assessable profits derived from QDIs can continue to enjoy the half rate on all such profits and at the same time, their first HK$2 million of assessable profits that are not derived from QDIs will be taxed at 8.25% or 7.5%.
Corporate income tax in Hong Kong is assessed in relation to a Year of Assessment (YA). The Year of Assessment is the year ended 31st March (i.e 1st April – 31st March). Hence the year ended 31st March 2019 is known as Year of Assessment 2018-19.
Generally, the assessable profits for a YA is based on the accounting period ending within that year of assessment.
The Inland Revenue Department (IRD) of Hong Kong generally issues the corporate profits tax returns on the first working day of April every year. Normally the company applies the extension within one month after they received the PTR (Profit Tax Return), the deadline can be extended as the following:
Normal issue date | For accounting year ended between | Normal filing date for unrepresented / represented cases | Due date for tax payment |
First working day in April of the following year of assessment | 1 April to 30 November | 2 May | As stipulated in the notice of assessment, generally between November of the year in which the return is issued to April of the following year. |
1 December to 31 December | 2 May / 15 August | ||
1 January to 31 March | 2 May / 15 November |
For example,
HK fiscal year is from 1st April 2018 to 31st March 2019, normally PTR will be issued on the 1st working day in April 2019
In the case of newly registered businesses, the Inland Revenue Department will issue the profits tax return 18 months after the date of commencement of business or the date of incorporation.
The company has to file a complete set of returns which includes the following:
Small corporations (defined as those corporations whose total gross income does not exceed HKD 500,000 for the basis period) only need to file their respective profits tax return form and supplementary form.
It is not mandatory to submit the other supporting documents mentioned above. However, it needs to be clearly understood that these documents must still be prepared before completion of the return and may be called for by the Department in appropriate circumstances.
With over 15 years of expertise in tax compliance, bookkeeping, and personal and corporate taxes, we can keep you on track of your business no matter where you are.
Profits tax is payable on the assessable profits for each year of assessment.
However, since it is possible to arrive at the assessable profits only at the end of the year concerned, an estimated tax based on the previous year’s figures will be issued. This estimated figure is the provisional profits tax, which is to be paid in two installments – the first installment is 75% of the liability and the remaining 25% is payable after three months. Once the final assessment based on the actual assessable profits is made, credit is given for the provisional tax paid.
If any excess payment has been made or if there are any outstanding payments to be made, they will be subtracted or added from the first installment of the provisional profits tax for the following year.
Your application for holding over of provisional tax should be lodged not later than:
If the provisional tax is payable by two installments and the first installment has been settled by the due date, an application for holding over of the whole or part of the second installment may be made subject to the prescribed time limit and grounds for application.
Late or not filing a tax return is a serious offense leading to penalties and even prosecution.
The following are exemption requirements for companies for submitting audited accounts together with their profits tax return:
For small corporations (defined as those corporations whose total gross income does not exceed HKD 2,000,000 for the basis period), audit is still required but it is not necessary to file to the Tax Authority.
Royalties and fees paid to non-resident entertainers or sportsmen for their performances in Hong Kong are subject to withholding tax on their assessable profits.
There are no withholding taxes levied on dividends and interest.
Sums received from performances in Hong Kong given by a non-resident entertainer or sportsman on or in connection with a commercial occasion or event are chargeable to Hong Kong Profits Tax. Such performance includes:
Double taxation arises when an income or profit is subject to tax in two jurisdictions – the country of source where the income is derived and the country of residence where the income is received. Double Tax Agreements or Tax Treaties seek to eliminate double taxation and encourages investments between jurisdictions.
Since Hong Kong follows the territorial system of taxation, where only income / profit sourced in Hong Kong is subject to tax, local companies will not be subject to double taxation on any income they earn outside Hong Kong.
Furthermore, any foreign tax paid on an income which is also subject to tax in Hong Kong, is a tax deductible expense.
Also, Hong Kong has established a network of more than 35 double tax treaties to provide further tax reliefs and reduced tax rates. For details, refer to Hong Kong Double Tax Treaties Guide.
Losses made in an accounting year are to be carried forward and set off against future profits of that trade but a corporation carrying on more than one trade may have losses in one trade offset against profits of the other.
Hong Kong does not allow for group relief of losses i.e transfer of losses between companies in the same corporate group. Losses cannot be carried back. Capital loss expenses are not allowed as deductions.
For gains or losses which are subject to concessionary tax rate, there are special provisions on the adjustment of losses between concessionary trading activities and normal trading activities.
An individual who incurs a trading loss and who claims Personal Assessment will have the loss allowed as a deduction from his total income.
A Hong Kong company is taxed on its assessable profits. The taxable income of a company is arrived at after making certain adjustments to the company’s net profit/loss data such as, deducting business expenses incurred in the production of profits, deducting capital allowances, deducting unutilised losses etc.
For more details refer to calculating taxable income for Hong Kong companies.
With over 15 years of expertise in tax compliance, bookkeeping, and personal and corporate taxes, we can keep you on track of your business no matter where you are.
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