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.
Flat Corporate Tax RateHong Kong has a flat corporate tax rate of 16.5% on assessable profits.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 issued in Hong Kong, and to offshore business of professional reinsurance companies.
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.
Single-Tier Corporate Tax SystemHong Kong follows a single-tier tax system (sometime called the “STS”) because profits earned by companies are only taxed once, i.e. on the company that gained those profits. When that company declares dividends, the profits thus distributed are no longer taxable on the shareholders of the company.
Corporate Tax Filing Requirements and Deadlines
The Inland Revenue Department (IRD) of Hong Kong generally issues the corporate profits tax returns on the 1st of April every year. Normally, businesses should file the profits tax return within 1 month from the date of issue. 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.
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.
Provisional Profits Tax
Profits tax is payable on the assessable profits for a particular 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.
Late or not filing a tax return is a serious offense leading to penalties and even prosecution.
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 2009 is known as Year of Assessment 2008-09. Generally, the assessable profits for a YA is based on the accounting period ending within that year of assessment.
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.
Tax Incentives Available
The following tax incentives are available to Hong Kong companies:
- Immediate writing off allowed for capital expenditure relating to manufacturing plant and machinery and computer hardware and software.
- Writing off over five years of assessment allowed for capital expenditure on refurbishment of business premises.
- Gains derived from qualified debt instruments will receive tax concessions.
- Reinsurance companies enjoy a concessionary tax rate on their offshore business operations.
- Interest gained from any deposit with an authorized institution in Hong Kong will enjoy tax exemption. Note: This does not include interest received by or accrued to a financial institution.
- Offshore funds (non-resident individuals, partnerships, trustees of trust estates or corporations) enjoy tax exemption on profits derived from transactions in securities, futures contracts, foreign exchange contracts, etc. in Hong Kong, which are carried out by corporations and authorized financial institutions licensed or registered under the Securities and Futures Ordinance. Note: The non-resident entity must not carry on any other business in Hong Kong.
- 100% deduction allowed for the capital expenditure incurred on plant and machinery. 20% deduction allowed on capital expenditure for each year in five consecutive years for installations forming part of a building or structure.
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 can be carried forward indefinitely and set off against future profits of that trade. 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.
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.