Every entity carrying on a trade, profession or business in Hong Kong has to pay tax on profits arising in or derived from Hong Kong from that trade, profession or business. Hong Kong’s simple and low tax regime is a key traction for international businesses focusing on Asian markets.
What is Assessable Profit in Hong Kong?
Corporations, partnerships, trustees and bodies of persons carrying on a trade, profession or business in Hong Kong are subject to tax on Hong Kong- sourced profits (excluding profits arising from the sale of capital assets).
Since Hong Kong follows a territorial taxation policy, all offshore profits or profits that are earned outside the territory of Hong Kong, regardless of whether they are repatriated or not, are exempted from tax in Hong Kong. Foreign companies, including branches of foreign companies, carrying on business in Hong Kong and deriving Hong Kong-sourced income are treated in the same way as domestic companies. To determine the source of income, ‘operations test’ is applied to identify the activities that generate the income and the place at which such activities are carried out.
Similar to offshore profits, capital gains, dividends and interest incomes from qualifying bank deposits and debt instruments are exempted for tax. While expenses of capital nature are not deductible in calculating the assessable profits, expenses that are incurred in the production of profits that are chargeable to tax are generally deductible.
What is Profit Tax Basis Period?
A year of assessment runs from 1 April to 31 March of the following year. The assessable profits for each year of assessment are computed by adjusting the accounting profit or loss for the financial year ending within that year of assessment.
What is the Corporate tax (Profit Tax) Rate in Hong Kong?
The standard rate is 16.5% for incorporated entities and 15% for unincorporated entities. Inland Revenue Ordinance 2018 enacted on 29 March 2018 introduced the two-tier tax system. Accordingly, from the assessment year, 2018 -2019 onwards, a profits tax rate of 8.25% will be charged on assessable profits of up to $2 million. Notably, this is half of the standard rate specified for corporations. Correspondingly, unincorporated entities such as partnerships and sole proprietorships will be charged 7.5%. Assessable profits above $2 million will continue to be subject to the rate of 16.5% for corporations and a standard rate of 15% for unincorporated businesses.
However, in the case of connected entities, only one of them may elect to be taxed under the two-tier tax regime. In case of a corporation that is a partner in a partnership, the concessionary tax rate of 8.25% will apply to only the first HKD 2 million of assessable profits, prorated based on its share in the partnership.
Effectively, the applicable tax rates are as below:
|Assessable Profits||Applicable Tax Rate|
|Up to $2 million||8.25%||7.5%|
|Above $2 million||16.5%||15%|
Regardless of their residential status, all taxpayers are subject to the same corporation or unincorporated business tax rate. However, in cases where tax computed under Personal Assessment is less than the aggregate amount of the tax charged separately under Profits Tax, Salaries Tax and Property Tax, any permanent or temporary resident of Hong Kong may obtain relief from the standard rate by electing to be assessed under personal assessment.
There is no surtax or alternative minimum tax in Hong Kong.
What are Tax Concessions in Hong Kong?
Note: A one-off reduction of profits tax by 75% for the year of assessment 2018/19 was offered, subject to a ceiling of $20,000 per case. On 15 August 2019, the Financial Secretary proposed to increase the one-off reduction of profits tax, salaries tax and tax under personal assessment for the year of assessment 2018/19 to 100% while retaining the ceiling of $20,000 per case.
A 50% concession on the standard tax rate is applied on the following:
- trading profits and interest income received or derived from “short/medium-term debt instruments” issued before 1 April 2018;
- profits of the offshore business of professional reinsurer, or authorised captive insurer for the year of assessment 2013/14 onwards;
- qualifying profits of a qualifying corporate treasury centre for the year of assessment 2016/17 onwards; and
- qualifying profits of a qualifying aircraft lessor or a qualifying aircraft leasing manager for the year of assessment 2017/18 onwards.
The following are exempted from profit tax:
- dividends received from a corporation which is subject to Hong Kong Profits Tax;
- amounts already included in the assessable profits of other persons chargeable to Profits Tax;
- Interest on Tax Reserve Certificates;
- Interest and trading profits from long term debt instruments
- Interest income and trading profits derived from a QDI issued on or after 1 April 2018, regardless of its tenor.
- Incomes received or accrued in respect of investments in mutual funds.
- Incomes from transactions in specified assets by all funds operating in Hong Kong, regardless of their structure, location of central management and control, size or purpose, subject to conditions, with effect from 1 April 2019.
A full deduction is allowed on the following expenses in the basis period in which the expenditure is incurred.
- Expenditure on plant and machinery especially related to manufacturing, and computer hardware and software is allowed
- Expenditure on environmental protection machinery
- Expenditure on environmental protection installation
- Expenditure on environment-friendly vehicle
In addition, capital expenditure incurred on the renovation or refurbishment of business premises can be deducted over a period of 5 years in equal instalments commencing in the year in which the expenditure is made.
Does Hong Kong has withholding tax?
There is no withholding tax on dividends, interests paid or technical fees paid by a Hong Kong entity to a resident or non-resident. However, royalties paid to a non-resident for the use of, or the right to use, most types of IP in Hong Kong are deemed to be taxable and applicable tax charges must be withheld by the payer. In the case of non-resident IP owners, up to 30% of the gross amount of the royalties paid are chargeable, thus resulting in an effective rate of 4.95% in general. However, in the case of an affiliated non-resident recipient of royalties or if the IP owner carries on business in Hong Kong, then 100% of the gross amount is chargeable resulting in effective rate of 16.5%.
Treatment of Losses
In the event of losses made in an accounting year, such losses may be carried forward and set off against future profits of that trade. Losses cannot be carried back. In the case of a company carrying on more than one trade, losses in one trade can be offset against profits of the other. In the case of losses subjected to concessionary tax treatment, there are special provisions for offsetting losses between trading income with concessionary taxes and standard taxes. Notably, a specific anti-avoidance legislation is in place to prevent the purchase of a loss-making company for the purpose of obtaining a tax benefit.
What are the Hong Kong Corporate Tax Filing Requirements?
The Inland Revenue Department (IRD) of Hong Kong generally issues the corporate profits tax returns on the first working day of April every year. In the case of newly incorporated companies, the tax return will be issued 18 months after the date of commencement of business or the date of incorporation. Hong Kong does not allow the filing of consolidated returns, and there are no provisions for the relief of group losses. Companies in the same group in Hong Kong must file tax returns and pay tax separately.
Generally, companies are required to submit the tax return stating the required information for the accounting within one month from the date of issue of returns. However, the tax return filing due date may be extended by filing an application under the “block extension” scheme. In the case of a first profits tax return for corporations and their first fiscal year exceeds 18 months, they may submit it within three months from the date of issue and the application is not required. The filing due date is as follows-
|Financial year ended||Filing due date|
|31 March||15 November of the calendar year in which the financial year ended|
|31 December||15 August of the calendar year following which the financial year ended|
|Other than 31 March and 31 December||30 April of the calendar year following which the financial year ended|
While companies with a gross income of less than $500,000 during the year of assessment are required to submit only the tax return form and supplementary form, other companies are required to submit the following along with the tax return form and supplementary form issued by the IRD.
- A certified copy of the Balance Sheet, Auditor’s Report and Profit & Loss Account for the relevant basis period
- A tax computation, explaining how the Assessable Profits (or Adjusted Loss) was determined.
- Other documents and information as required by the IRD.
The revenue department issues the assessments upon receiving the tax return. Companies and businesses are required to pay a provisional profits tax based on the preceding year’s profits. Failure to comply with the filing and payment obligations will attract surcharge and penalties.
Are there exemptions from Audit in Hong Kong?
Dormant companies that have declared the dormancy by filing a resolution to that effect with the Company Registry and companies that are incorporated in jurisdictions that do not require accounts to be audited are exempted from audit.
Provisional Profits Tax
Assessable profits are subjected to tax for each year of assessment. Since assessable profits for any year of assessment can be determined only after the end of that particular year, a provisional tax charge is estimated based on the preceding year’s charge is raised. The provisional tax estimate must be paid in two instalments. Subsequently, when the assessable profits for the year of assessment can be determined, and actual tax charges are ascertained, the payments made towards provisional tax charges will be utilised to offset the liability under the actual tax assessment.
An application for holding over of provisional profits tax may be made on one of the following grounds:
- assessable profits are or are likely to be, less than 90% of the assessable profits of the preceding year.
- the amount of any loss brought forward for set off to that year of assessment has been omitted or is incorrect.
- cessation of trade, profession or business.
- election to be personally assessed, thus likely resulting in lower assessable profits for the year of assessment.
- objection raised over the assessment of profits tax for the preceding year.
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 the later.
What are the Relief From Double Taxation in Hong Kong ?
Hong Kong has established an extensive network of Avoidance of Double Taxation Agreement (DTA) with jurisdictions around the world. As it follows a territorial tax system, incomes earned outside Hong Kong are not taxed by the IRD, any foreign tax paid on an income which is also subject to tax in Hong Kong, can be offset against Hong Kong tax liabilities. Likewise, credits for Hong Kong tax paid could be offset on taxes payable on those incomes that are also chargeable in DTA partner countries.
Other Taxes in Hong Kong
There is no payroll tax in Hong Kong. However, the employers and employees are required to make a regular contribution towards the Mandatory Provident Fund (MPF) scheme. While the employees with a monthly income of $7,100 per month exempted from making any contribution to the MPF, the employers need to contribute 5% of such employees’ income towards MPF. In the case of employees earning more than $7,100 monthly income, the employer is required to pay 5% as their own contribution and deduct 5% as the employee’s contribution to the MPF scheme.
Property tax is charged at a standard rate of 15% of the net assessable value of the property. A statutory allowance of 20% on the net assessable value for repairs and maintenance can be deducted from the assessable value of the property. Stamp duty of 0.2% on the value of shares transferred is chargeable on shares transfer, and the charge is shared equally between the buyer and seller. The stamp duty on lease agreements vary according to the tenure of the lease, from 0.25% for tenures of one year or less to 1% for tenures exceeding three years. In the case of property conveyance, a maximum ad valorem duty of 8.5% is chargeable on the non-residential property, and a flat 15% is chargeable on residential property. If the residential property is sold within 36 months, a special stamp duty (SSD) ranging from 5% to 20% is levied. A buyer’s stamp duty at a flat rate of 15% applies to a residential property if it is acquired by any person, including a limited company, except a Hong Kong permanent resident.
 Personal assessment may reduce the tax payable by individual taxpayers who have to pay profits tax and/or property tax. However, those who have incomes subject to salaries tax will not benefit from electing for personal assessment. Taxpayers can elect for personal assessment if they consider it will reduce their tax liabilities.
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