Hong Kong Profits Tax
Hong Kong is world renowned for its simple and low tax regime, making it one of the most business-friendly jurisdictions in the world. 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.
This guide provides a detailed overview of income tax rates, tax system, and tax incentives for Hong Kong companies. For a general overview of the overall tax syste in Hong Kong, refer to Overview of Hong Kong’s Tax System. To estimate your Hong Kong taxes and compare them with your home country, refer to Online Tax Calculator.
Territorial Corporate Tax System
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.
Flat Corporate Tax Rate: The Two-Tier Profits Tax Rates Regime effective from Year of Assessment 2018/19In Hong, Kong, corporations have two options for Profit Tax Rates. The first one is the traditional one: Single-Tier Corporate Tax System and the second one is Two-Tier Profits Tax Regime.
In Hong Kong, for Single-Tier Corporate Tax System-corporations are taxed at 16.5% on assessable profits and unincorporated businesses are taxed at 15%. With effect from 1 April 2018, a two-tiered profits tax rates regime applies. The two-tiered 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 will be 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 will significantly reduce the tax burden of most taxpaying small and medium-sized enterprises (SMEs).
- For corporations, the first HK$2 million of profits will be taxed at one-half of the current tax rate (i.e., 8.25%) and the remaining profits will continue to be taxed at the existing 16.5% tax rate.
- For unincorporated businesses, the first HK$2 million of profits will be taxed at one-half of the current tax rate (i.e., 7.5%) and the remaining profits will be taxed at the existing 15% tax rate.
Only one “entity” within a group of “connected entities” can enjoy the two-tier rates. For this purpose, the group will need to indentify which entity will benefit and to make election accordingly.
The applicable tax rates are as follows:
|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 the Budget for 2019/20, a one-off reduction of 75% of the profits tax is proposed for the year of assessment 2018/19, subject to a maximum of HKD 20,000 per case.
In order to avoid double benefits, the following enterprises shall be excluded from the two-tiered profits tax regime:
- enterprises electing the preferential half-rate tax regimes (e.g., professional reinsurance companies, captive insurance companies, corporate treasury centres and aircraft leasing companies);
- the assessable profits for sums received by or accrued to holders of qualifying debt instruments as interest, gains or profits should already be taxed at half the rate (i.e., 7.5% or 8.25%, as the case may be);
- in presence of a group of companies in HK, only one will be elegible for 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%.
Tax Incentives AvailableProfits tax exemption for eligible onshore and offshore funds operating in Hong Kong available. Tax incentives include the following:
- as an incentive for investment in high-value manufacturing businesses, 100% write-off for new expenditure on plant and machinery specifically related to manufacturing, and on computer hardware and software, which are owned by the end-users;
- a 5-year write-off period for capital expenditure on the renovation or refurbishment of business premises;
- tax concessions for mutual funds and trusts;
- tax exemption for interest derived from any deposit accrued on or after 22 June 1998, placed in Hong Kong with an authorized institution (not applicable to interest received by or accrued to a financial institution);
- a 100% deduction of capital expenditure on environment protection machinery and environment-friendly vehicles;
- a 100% profits tax deduction for capital expenditure incurred in relation to environmental protection installations, where the expenditure is incurred in a year of assessment commencing on or after 1 April 2018;
- a 100% profits tax deduction for capital expenditure on environment-friendly vehicles in the year of purchase, with effect from the year of assessment 2010/11;
- a tax concession for captive insurers, in the form of a 50% reduction of the profits tax on offshore risk insurance business, with effect from the year of assessment 2013/14;
- with effect from 1 April 2017, a qualifying aircraft lessor/manager is entitled to have its qualifying profits taxed at half of the corporate profits tax rate. In addition, a qualifying aircraft lessor is eligible for a tax base concession under which only 20% of the net lease rentals are assessed to compensate for their non-entitlement to depreciation allowances on the aircraft;
- with effect from 1 April 2019, all funds operating in Hong Kong, regardless of their structure, location of central management and control, size or purpose, can enjoy profits tax exemption on their transactions in specified assets subject to certain conditions. A fund can also enjoy profits tax exemption on its investments in both overseas and local private companies;
- with effect from 1 April 2018, profit tax deductions for capital expenditure incurred by enterprises for the purchase of intellectual property rights, i.e. patents, know-how, copyrights, registered designs, registered trademarks, rights in layout design (topography) of integrated circuits, rights in plant varieties, and rights in performances
Income Tax Basis Period
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.
Corporate Tax Filing Requirements and Deadlines
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
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
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
- Company Financial year ended between 1st April until 30th Dec 2018 – No extension is permitted, must file the PTR within 1 month after it received
- Company Financial year ended 31st Dec 2018 – PTR submission can be extended until 15th Aug 2019
- Company Financial year ended between 1st Jan to 31st Mar 2019 – PTR submission can be extended until 15th Nov 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:
- The specific profits tax return form as issued by the Inland Revenue Department
- A supplementary form as issued by the Inland Revenue Department for your tax data and financial data etc.
- A certified copy of the Balance Sheet, Auditor’s Report and Profit & Loss Account pertaining to the basis period
- A tax computation showing how the amount of Assessable Profits (or Adjusted Loss) has been arrived at.
- Other documents and information as specified in the Notes and Instructions.
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.
Provisional Profits Tax
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:
- 28 days before the due date for payment of the provisional tax, or
- 14 days after the date of issue of the notice for payment of the provisional tax, whichever is later.
If the provisional tax is payable by two instalments and the first instalment has been settled by the due date, an application for holding over of the whole or part of the second instalment 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.
Income Tax Audit Exemption Requirements
The following are exemption requirements for companies for submitting audited accounts together with their profits tax return:
- Dormant companies as per the Companies Ordinance definition (defined as having “no relevant accounting transactions” during a financial year) are exempted from preparing audit only when they apply the official dormant status by filing the special resolution to the Company Registry
- Companies incorporated in a jurisdiction whose laws do not require accounts to be audited
- Hong Kong branch of a foreign company, provided that the following information is supplied together with the return:
- the place of incorporation of the foreign company
- whether the laws of that country require a statutory audit of the world-wide accounts of the company
- whether that audit has been conducted and
- a brief summary of the financial and accounting records maintained by the Hong Kong branch
- certified copy of the financial and accounting records
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.
Withholding Tax Rules
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:
- any appearance of the entertainer or sportsman by way of or in connection with the promotion of any such occasion or event;
- any participation by the entertainer or sportsman in or for sound recording, films, videos, radio, television or other similar transmissions (whether live or recorded).
Relief from Double Taxation
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.
Tax Treatment of Losses
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.
Net Income Vs Taxable 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.