Hong Kong Profit Tax and Corporate Tax Rate

Hong Kong Profit Tax and Corporate Tax Rate

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Taxation

Hong Kong has a simple and low tax system that has earned its global recognition and has made it one of the most business-friendly jurisdictions in the world. This guide describes Hong Kong tax rate, corporate tax system, profit tax return, and tax incentives for Hong Kong companies in detail.

Hong Kong’s corporate tax, namely profit tax or profits tax, is based on a territorial and flat-rate principle. Tax incentives have been created to enhance Hong Kong’s competitiveness and to strengthen its status as an investment destination in the Asia-Pacific region.

For a broad look at the entire taxation structure in Hong Kong, refer to: A Beginner’s Guide to Hong Kong Taxation

Learn more company formation in Hong Kong

For a tax estimation and comparison between Hong Kong and your home country, refer to: Online Tax Calculator.

Hong Kong Profit Tax and Corporate Tax Rate

Territorial Profit Tax System: Hong Kong Tax Rate

Hong Kong adopts the territorial taxation system. This is equivalent to the levy of tax only on Hong Kong profits arising from trade, business or profession. No profit tax is levied on profits that are sourced from outside Hong Kong. Therefore, if you have a business in Hong Kong but your profits are generated from elsewhere, you do not need to pay the profit tax, regardless of whether you have remitted the profits to Hong Kong or not.

The territorial principle does not differentiate between the residents and non-residents. If you are a resident in Hong Kong and if your profits are derived elsewhere, you are not liable to pay any tax on those profits. Similarly, a non-resident who derives profits in Hong Kong will also be subject to tax on profits.

These two questions, namely whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong are largely questions of fact. Nevertheless, some useful information on the principles applied can be derived from cases which have been decided by the courts in Hong Kong and in other common law jurisdictions. Please read further to know more about the Hong Kong corporate tax rate and profits tax rate.

Related Article: 2024 Tax Filing Season: Tax Deadline 2024 in Hong Kong You Need To Know About

Hong Kong’s Corporate Tax System: The Two-Tier Profits Tax Rates Regime, effective from the Year of Assessment 2018/19.

In Hong Kong, corporations have two Profit Tax Rate options:

Single-Tier Corporate Tax System

The Single-Tier Corporate Tax System 16.5% tax rate is imposed on corporations, while 15% tax rate is imposed on unincorporated businesses.

Two-Tier Profits Tax Regime

The Two-Tier Profits Tax Regime is applicable to corporations as well as unincorporated businesses in that it reduces the tax rate for the first $2 million of assessable profits.

The two-tier profits tax rates is effective from 2018/19 year of assessment (i.e., a taxpayer’s financial year ending between 1 April 2018 and 31 March 2019) with an objective of substantial tax relief to a majority of taxpaying small and medium-sized enterprises (SMEs).

  • For corporations, the initial HK$2 million of profits shall be taxed at one-half of the current tax rate (i.e. 8.25%) and the remaining profits shall continue to be taxed at the existing 16.5% tax rate.
  • For unincorporated businesses, the first HK$2 million of profits will be subject to tax at half the current tax rate (i.e., 7.5%) with the remaining profits being taxed at the existing 15% rate.

The two-tier rates can only be enjoyed by one “entity” within a group of “connected entity”. For this, the group needs to determine which entity will benefit and make election accordingly.

Hong Kong Corporate Tax Rate: The relevant tax rates are:

Hong Kong Corporate Profit Tax Rate

In order to avoid double benefits, the following enterprises shall be excluded from the two-tiered profits tax regime:

  • enterprises that opt for the advantageous half-rate tax regimes (for example professional reinsurance companies, captive insurance companies, corporate treasury centres and aircraft leasing companies);
  • the assessable profits for amounts received by or accrued to holders of qualifying debt instruments as interest, gains or profits should have been taxed at half the rate (i.e., 7.5% or 8.25%, as the case may be);
  • In the presence of a group of companies in HK, only one will qualify for the two-tiered profits tax regime.

A concessional tax rate at 50% of the normal profits tax rate will be applicable to trading profits and interest income received or derived from qualifying debt instruments (QDIs) issued in Hong Kong, as well as offshore business of professional reinsurance companies.

The profits from QDIs, which are already taxed at 8.25% or 7.5%, will be excluded from the HK$2 million threshold for the application of the two-tier rates. This implies that companies that have assessable profits resulting from QDIs will retain the half rate on all such profits, and, in addition, their first HK$2 million of assessable profits that are not derived from QDIs will be taxed at 8.25% or 7.5%.

Which tax benefits does Hong Kong provide?

Tax exemption for profits in the eligible onshore and offshore funds operating in Hong Kong is provided. Tax incentives include the following:

  • 100% write-off for new expenditure on plant and machinery directly related to manufacturing and on computer hardware and software that are owned by the end-users, as a spur for investment in high-value manufacturing businesses;
  • a 5 years write-off period in respect of the capital expenditure incurred on the renovation or refurbishment of business premises;
  • tax benefits to mutual funds and trusts;
  • tax exemption for interest derived from any deposit placed in Hong Kong with an authorized institution after 22 June 1998 (not applicable to interest received by or accrued to a financial institution);
  • an allowance of 100% of capital expenditure incurred on environment protection machinery and environment-friendly vehicles;
  • a 100% tax deduction of profit for capital expenditure in relation to environmental protection installations, when the expenditure is incurred in a year of assessment beginning on or after 1st April 2018;
  • a 100% allowance for capital expenditure on environment-friendly vehicles in the year of purchase, effective from the year of assessment 2010/11;
  • a tax break for captive insurers, in the form of 50 percent off the profits tax on offshore risk insurance business, from the year of assessment 2013/14;
  • From 1 April 2017, a qualifying aircraft lessor/manager gets half of the corporate profits tax rate for taxing of the qualifying profits. Besides, a qualifying aircraft lessor benefits from a tax base concession under which only 20% of the net lease rentals are taxed in order to make up for no depreciation allowances on the aircraft;
  • From 1 April 2019 all funds either organized in Hong Kong or managed and controlled there, of any size, type or purpose, are allowed to enjoy profits tax exemption on transactions in specified assets. A fund also receives tax exemption on profits from its investments in local and overseas private companies;
  • 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.

Taxable Income Assessment Period

The corporate income tax in Hong Kong is based on a Year of Assessment (YA). The Year of Assessment is the year ended 31st March (i.e 1st April to 31st March). Therefore, the year ended on 31st March 2024 is called the Year of Assessment 2023-24.

Usually, the assessable profits for a YA are determined on the accounting period ending within that year of assessment.

How do I file my profits or corporate tax return?

Corporate profit tax returns are usually issued by the Inland Revenue Department (IRD) of Hong Kong on the first working date 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:

How to File Profits tax return or Corporate Tax Return

For example,

HK tax year is from 1st April 2023 to 31st March 2024, usually PTR will be issued on the 1st working day in April 2024.

  • The end of company financial year is between April 1st to Dec 30th 2023 – Extensions are not permitted, the PTR must file within 1 month after it received.
  • Company financial year ended 31st Dec 2023 – hence PTR submission can be extended until 15th Aug 2024.
  • Company: Financial year ended between 1st Jan to 31st Mar 2024– Filing should be extended, if required, until 15th Nov 2024.

In the case of newly registered businesses, the Inland Revenue Department will issue the returns 18 months later after the date of commencing business or the date of incorporation.

The company has to file a complete set of returns which includes the following:

  • Profit tax return form issued by the Inland Revenue Department
  • Supplementary form issued by the Inland Revenue Department issued for collecting your tax data and financial data and so forth.
  • The documents prescribed for lodging the tax return are Balance Sheet, Auditor’s Report and Profit & Loss Account related to the basis period.
  • The tax computation showing computations of the Basis of Assessment (or adjusted loss).
  • Other data and information mentioned in the Notes and Instructions.

The case of such small corporations (which are those corporations whose total gross income does not surpass HKD 500,000 for the basis period) is that they only need to lodge their profits tax return form and supplementary form.Please note that it is entirely optional to provide the items listed in above statement. Nevertheless, it should be kept in mind that they must also be prepared before filing of the return and these may be demanded in suitable circumstances by the Department.

Provisional Profits Tax

Profit tax is calculated over the assessable profits earned in each year of assessment.

Nevertheless, it can be determined how much assessable profit one has made only at the end of the year considered and then, a estimated tax would be given in the form of the previous year’s figures. This amount is the provisional profit tax , which is made of the two installments: 1st one is 75% of the liability and the second one is 25% payable three months later. When the final assessment of the tax on income earned in the year under review is completed, a credit is given for the provisional tax paid.

If there is any overpaid or arrears due, then they will be treated as a deduction or addition to the first installment of the provisional profits tax for the following year.

An application for holding over of provisional tax should be lodged not later than:

  • 28 days prior to the payment date for the provisional tax which is due, or;
  • 14 days upon the due date of the notice for payment of the provisional tax, whichever comes later.

Where the provisional profit tax is payable by two installments and the first installment has been settled by the due date, an application for the holding over of the whole or part of the second installation would be eligible applying the prescribed time limit and dates of the application.Failing to file or late filing of tax returns is a serious offense that may lead to penalties and prosecution.

Income Tax Audit Exemption Criteria

The following are exemption requirements for companies for submitting audited accounts together with their profit tax return:

  • The Companies Ordinance definition (a kind of a “dormant company” which hasn’t been carrying out any relevant accounting transactions for a financial year) has an exemption under which the audit is not required when such a company applies for the dormant status by filing the special resolution at the Company Registry.
  • Companies whose place of incorporation is in a jurisdiction which does not impose an audit requirement on the accounts.
  • Hong Kong branch of a foreign company, provided that the following information is supplied together with the return:Hong Kong branch of a foreign company, provided that the following information is supplied together with the return:
    • the location of the country of incorporation of the foreign entity.
    • whether the laws of this country demand a conducting of a statutory audit of the world-wide accounts of the company.
    • whether that audit has been done
    • a concise report of the financial and accounting records which are set up by the Hong Kong branch.
    • the original signed copy of the financial and accounting records.

For corporations with gross income of less than HKD 2,000,000 (this is referred to as small corporations), audit is required but not necessary to file declaration with the Tax Authority.

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Withholding Tax Rules

The non-resident entertainers or sportsmen who perform in Hong Kong and get the royalties or fees from their performances should pay the withholding tax on the assessable profits.

There is no withholding tax on payment of dividend or interest.

Hong Kong Profits Tax is applicable to performances fees received from Hong Kong by entertainers or sportsmen who live outside the territory, which are given on or at the occasion of a commercial event or business.Such performance includes:

  • the entertainer or the sportsman (howsoever he themselves may appear) during the course of or in relation with the promo of any such event or occasion.
  • performance by the performer or athlete for a sound recording, films, videos, radio, television or other media transmission or medium (live or recorded).

Relief from Double Taxation

Double Taxation occurs when income or profit is subjected to payment of tax in two jurisdictions – the country of origin where the income is earned and the country of residence where the income is received. The Double Tax Agreements or Tax Treaties are devised for the purpose of eliminating the double taxation and promoting the investments across different jurisdictions.

As Hong Kong applies the territorial system of income tax, where only income / profit source in Hong Kong is taxed, Hong Kong companies will not suffer from double taxation on any income they earn from overseas.

Moreover, the tax paid on the income that is taxed in the territory of Hong Kong is a deductible tax expense.

In addition, Hong Kong has crossed the mark of 35 double taxation treaties to create a wider scope of tax advantages and lower tax rates.  

Tax Treatment for Losses

Losses in one accounting year are to be held on until the following year and will be set off against the future profits of that trade. However, a corporation with more than one trade can offset the losses from one trade with the profits of the other.

The rule of Hong Kong does not allow for group relief from losses, which means that there can be no transfer of losses between different companies in the same corporate group. Losses cannot be vested. Capital loss expenses are not allowed as an allowable deduction.

There are special provisions on the adjustments of losses resulting from the concessionary trading activities and normal trading activities, for any gains or losses which are subject to the concessionary tax rate.

If an individual who trades and claims Personal Assessment incurs a loss, he will have the loss allowed as a deduction from his total income.

Net Income Vs Taxable Income

There will be profit tax imposed on a company in Hong Kong, which is based on its assessable profit. When deciding on the taxable income of a company, certain adjustments have to be made to the net profit/loss figures of the company such as, deducting operational expenses incurred in the production of profits, deducting capital allowances etc.

How FastLane Group can Help?

FastLane Group provides specialized services, dealing with taxation issues of Hong Kong businesses. As corporate tax advisors our CPAs and tax specialists are experienced in handling all complexities of the corporate tax system, thus ensuring compliance and improving tax positions. Worrying about your profit tax? We can take care of these for you with our efficiency and expertise. Contact us now.

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