In the business world, whether you are a freelancer, the owner of a sole proprietorship or partnership, or a decision-maker in a limited company, annual tax filing is an indispensable and critical aspect of business operations.
So, if you are considering starting a business, do you possess sufficient understanding of the Hong Kong tax system? Are you concerned that various tax issues might impact your future business development? … If you have questions about the Hong Kong tax system, you may find some insights in this article.
Currently, Hong Kong primarily levies three types of direct taxes: Salaries Tax on income arising from any office, employment, or pension; Profits Tax on business profits; and Property Tax on property income. Furthermore, Hong Kong does not impose Value-Added Tax (VAT) or Sales Tax, Capital Gains Tax, Withholding Tax on dividends or interest, or Estate Duty.
* As Profits Tax is highly relevant to corporate development, we will focus next on key aspects of Profits Tax filing:
● What is Profits Tax?
Profits Tax is levied on assessable profits arising in the year of assessment. According to Section 14 of the Inland Revenue Ordinance (IRO), Chapter 112, Hong Kong adopts a territorial source principle of taxation. This means only profits derived from a trade, profession, or business carried on in Hong Kong are taxable. Conversely, if an enterprise is located in Hong Kong but its profits have a source outside Hong Kong, those profits are not taxable.
● Who is liable to pay Profits Tax?
According to the Inland Revenue Department’s (IRD) guidelines, any person, whether resident in Hong Kong or not, carrying on a trade, profession, or business in Hong Kong is chargeable to tax on all assessable profits arising in or derived from Hong Kong (excluding profits from the sale of capital assets). This includes:
Corporations: Companies incorporated under the Companies Ordinance, such as limited companies.
Persons other than Corporations: Including sole proprietors, partnerships, trustees or bodies of persons, and self-employed individuals.
● How is Profits Tax calculated?
Historically, Hong Kong’s Profits Tax had only a standard rate. Starting from 2018, the Hong Kong government introduced a two-tiered tax rate system, allowing all entities with taxable profits in Hong Kong to benefit from a lower tax rate:
| Applicable Entity | Rate (on the first HKD 2 million of assessable profits) | Rate (on assessable profits over HKD 2 million) |
| Corporations | 8.25% | 16.5% |
| Unincorporated Businesses | 7.5% | 15% |
Additionally, certain eligible profits received or accrued from specific qualifying transactions or activities may enjoy concessionary tax rates, including:
| Qualifying Transaction / Specified Entity | Concessionary Tax Rate | Effective From |
| Qualifying Intellectual Property Income | 5% | On or after 1 April 2023 |
| Short / Medium-term Debt Instruments (Issued before 1 April 2018) | 8.25% | Before 1 April 2018 |
| Short / Medium-term Debt Instruments (Issued on or after 1 April 2018) | 0% | On or after 1 April 2018 |
| Corporate Treasury Centre | 8.25% | 2016 |
| Aircraft and Ship Leasing | 0% or 8.25% | Case-dependent |
| Qualifying Reinsurance | 8.25% | 2018 |
| Insurance | 8.25% | 2020 |
| Family-owned Investment Holding Vehicles | 0% | 2022 |
● Calculation Method for Profits Tax
Generally, the Profits Tax calculation formula is: Profits Tax Payable = Assessable Profits (i.e., Total Revenue Determined – Deductible Outgoings) × Applicable Tax Rate.
Where:
— Total Revenue Determined: Calculate all revenue generated in Hong Kong by the business during the year of assessment.
— Deductible Outgoings: From the total revenue, deduct all business expenses incurred in producing the profits and permitted as deductions under the IRO.
— Calculate Assessable Profits: Total revenue minus allowable deductions equals assessable profits.
— Apply Applicable Tax Rate: Apply the appropriate Profits Tax rate based on business type (Corporation or Unincorporated) and the amount of assessable profits.
Regarding the definition of deductible outgoings, generally, all expenses incurred by a taxpayer in the production of assessable profits are deductible under Section 16 of the IRO, such as operating expenses, employee salaries, depreciation, etc.
● Other Key Points for Profits Tax Filing
Both unincorporated businesses and limited companies are required to file tax returns, but the filing methods differ slightly. A sole proprietorship (an unincorporated business) reports its profits in the owner’s individual tax return and does not file separately. Partnerships (unincorporated) and limited companies must file separate Profits Tax returns.
— Tax Filing Timeline for Companies
Newly Registered Business: The first Profits Tax return is normally issued about 18 months after the commencement of the new business or incorporation.
Ongoing Business: Profits Tax returns are generally issued on the first working day of April each year.
— Deadline for Submitting Tax Returns
Under normal circumstances, the return should be filed within 1 month from the date of issue.
First-time filers are automatically granted an extended deadline, typically an additional 2 months by the IRD (no application needed). Further extensions are generally not granted for first returns.
E-filing is normally granted an automatic one-month extension beyond the standard deadline.
— Consequences of Late Filing
Fulfilling tax obligations is mandatory. Late submission of a Profits Tax return may result in a penalty of up to HKD 10,000 and payment of triple the tax assessed, and may also lead to prosecution.
Failure to comply with tax obligations, such as not maintaining sufficient business records of income and expenditure, incorrect reporting, or failure to provide a reasonable explanation, could lead to a maximum fine of HKD 50,000, payment of three times the amount of tax undercharged, and imprisonment for up to 3 years.
Facing complex financial statements and increasingly stringent tax regulations, have you ever lost sleep worrying about omissions leading to unnecessary penalties? Rest assured. As one of Hong Kong’s earliest business centres to establish a full suite of service systems, Capital Business Centre has integrated an accounting service team at its core, providing tailored, comprehensive accounting and tax filing solutions for every resident client.
● Accounting and Tax Filing Services
Our professional accounting team at Capital International Business Centre will assist you in meticulously reviewing every transaction, ensuring proper documentation and clear accounts. Whether it’s daily bookkeeping or annual financial statements, we handle it with ease.
Furthermore, our accounting experts leverage their extensive experience and professional knowledge to prepare accurate and compliant reports for you, ensuring your business operates securely within the legal framework.
Does the thought of Profits Tax filing make you nervous? In fact, with assistance from Capital International Business Centre, it becomes straightforward. We not only help prepare detailed audit reports but also guide you in correctly completing tax returns, ensuring accurate reporting for smooth processing.
We will also develop a customized tax filing strategy based on your enterprise’s specific circumstances, aiming to maximize your tax benefits and ensure optimal use of funds.
You might ask, with numerous accounting services available, why choose those provided by Capital Business Centre?
The answer is simple: Professionalism, Efficiency, and Cost-Effectiveness.
In this fast-paced era, time is money and efficiency is paramount. Capital’s accounting team possesses not only profound theoretical accounting knowledge but also rich practical experience, enabling them to quickly identify and resolve various financial challenges. Simultaneously, as part of a business centre, they gain a deeper understanding of client needs, providing customized service solutions that achieve the best balance between efficiency and cost. This allows you to face tax challenges with composure and steady progress.