Profit Tax in Hong Kong

Hong Kong has built its reputation as a global business hub not only on its open economy and strategic location but also on its simple and transparent tax regime. At the core of this system is profits tax — Hong Kong’s version of corporate income tax.

Unlike many jurisdictions that tax companies on worldwide income, Hong Kong follows the territorial principle. This means only profits earned from business activities carried out in Hong Kong are taxable. Offshore income may be exempt, provided the right conditions and documentation are in place.

The standard profit tax rate is already competitive — 16.5% for corporations and 15% for unincorporated businesses. On top of this, Hong Kong offers a two-tier tax rate system, reducing the tax rate to 8.25% (corporations) and 7.5% (unincorporated businesses) on the first HK$2 million of assessable profits, giving SMEs meaningful relief.

With no VAT, no capital gains tax, and no withholding tax on dividends or interest, Hong Kong’s profits tax framework is widely regarded as one of the most business-friendly in Asia. These advantages, combined with an extensive network of Double Taxation Agreements (DTAs) and new compliance standards like FSIE and BEPS 2.0, position Hong Kong as a jurisdiction that balances tax efficiency with international credibility.

This guide will walk you through everything you need to know about profit tax in Hong Kong in 2025 — from how the system works to the latest rates, exemptions, deductions, filing requirements, and future developments.

Profit Tax Rates in Hong Kong (2025)

Hong Kong applies straightforward profit tax rates that remain among the most competitive in Asia. These rates apply to any business carrying on a trade, profession, or business in Hong Kong, whether incorporated locally or overseas.

Standard Profit Tax Rate

• Corporations (companies): 16.5% on assessable profits
• Unincorporated businesses (sole proprietorships and partnerships): 15%
  

These rates are flat and apply only to taxable profits derived from Hong Kong business activities, in line with the territorial tax system.

Two-Tier Profit Tax Rate System

To reduce the burden on small and medium-sized enterprises (SMEs), Hong Kong introduced a two-tier profit tax system:

Important notes:

• Only one entity within a group can claim the two-tier rates in each year of assessment.
• Businesses already benefiting from specific preferential tax regimes (such as corporate treasury centres, aircraft or ship leasing, and certain insurance activities) are excluded to prevent double benefits.
  

Concessionary Profit Tax Rates

Hong Kong also offers reduced corporate income tax rates for selected industries that meet qualifying conditions. In many cases, the rate is 50% of the standard rate (8.25% for corporations), while some activities may even enjoy a 0% rate. These include:

• Qualifying profits from aircraft leasing or ship leasing
• Certain insurance and reinsurance businesses
• Corporate treasury centres
• Family-owned investment holding vehicles managed by eligible single-family offices

Who Pays Profits Tax in Hong Kong

Any person or entity carrying on a trade, profession, or business in Hong Kong may be liable to pay profits tax, regardless of residency status. What matters is whether the profits are sourced in Hong Kong.

Entities Subject to Profits Tax

• Corporations – incorporated in Hong Kong or overseas but operating locally
  
• Unincorporated businesses – sole proprietorships and partnerships
  
• Trustees, organizations, and joint ventures conducting business in Hong Kong
  

The Inland Revenue Department (IRD) does not distinguish between resident and non-resident companies. Both are taxed on profits earned from activities carried out in Hong Kong.

What is Taxable?

• Onshore profits: taxable under Hong Kong’s corporate income tax regime
  
• Offshore profits: generally exempt if derived entirely outside Hong Kong, subject to IRD approval
  

Profits from the sale of capital assets are excluded, as capital gains are not taxable in Hong Kong.

Why This Matters for Businesses

This approach makes Hong Kong particularly attractive to international businesses. A company can be incorporated in Hong Kong but only taxed on its locally generated income, while offshore profits may remain outside the scope of profit tax — provided it can prove sufficient documentation and substance.

Offshore Profits and the FSIE Regime

One of Hong Kong’s most attractive features is its territorial tax system, under which only profits earned from business operations carried out in Hong Kong are taxable. This means that offshore profits — income derived entirely outside Hong Kong — may qualify for exemption from profits tax, provided the company can prove that all core business activities took place overseas.

Offshore Tax Exemption in Practice

Common examples of offshore profits include:

• Sale of goods to overseas customers where contracts, services, and delivery occur outside Hong Kong
• Provision of services fully performed outside Hong Kong
• Management and operations carried out exclusively overseas
  

However, the IRD (Inland Revenue Department) carefully reviews each case and requires detailed documentation to support offshore claims.

The FSIE Regime (Effective from 1 January 2024)

To align with international tax standards and prevent tax avoidance through shell companies, Hong Kong introduced the Foreign-Sourced Income Exemption (FSIE) regime. Under this framework, certain types of passive income received in Hong Kong are subject to profits tax unless specific conditions are met.

Types of Foreign-Sourced Income Covered:

• Interest income
• Dividends
• Gains from disposal of equity interests and other properties
• Intellectual property (IP) income
  

Exception Requirements:

To benefit from exemptions under the FSIE regime, businesses must meet at least one of the following conditions:

• Economic Substance Requirement – demonstrating real business presence in Hong Kong (e.g., office, employees, decision-making).
• Participation Requirement – for dividend income, proving sufficient ownership and substance in the underlying entity.
• Nexus Requirement – for IP income, showing genuine development, enhancement, maintenance, protection, or exploitation of the IP in Hong Kong.
  

Why FSIE Matters for Businesses

The FSIE regime reinforces Hong Kong’s compliance with international tax frameworks (including EU standards) while preserving the attractiveness of its territorial system. For businesses with cross-border structures, it is now more important than ever to assess corporate income tax exposure and maintain the right level of substance in Hong Kong.

Deductions, Allowances, and Tax Incentives

Hong Kong’s profits tax regime is not only simple but also offers businesses various ways to reduce their tax liability through deductions, allowances, and incentives. These measures ensure that expenses genuinely incurred in generating assessable profits can be offset, lowering the overall profit tax rate effectively paid by a company.

General Deductible Expenses

The Inland Revenue Department (IRD) allows a wide range of operating expenses to be deducted when calculating assessable profits, including:

• Rent, utilities, and office expenses
• Salaries, wages, and employee benefits
• Business-related travel and marketing costs
• Professional fees and service charges
• Charitable donations (up to 35% of adjusted assessable profits)
  

Expenses that are capital in nature, private, or unrelated to profit generation are non-deductible.

Depreciation and Capital Allowances

Hong Kong businesses can claim allowances for depreciation on fixed assets, which reduce the taxable base:

• Industrial buildings: 20% initial allowance, 4% annual allowance
• Commercial buildings: 4% annual allowance
• Plant and machinery: 60% initial allowance, then 10–30% annual allowance on reducing balance
  

These allowances encourage businesses to reinvest in infrastructure and equipment while managing their corporate income tax exposure.

Environmental Protection and Green-Tech Incentives

To promote sustainability, the government allows accelerated deductions for environmentally friendly investments:

• 100% deduction in the year of purchase for eligible green machinery, computer hardware/software, or eco-friendly vehicles
• 20% annual deduction over five years for certain environmental installations
  

Intellectual Property (IP) Incentives

Qualifying income from intellectual property developed or managed in Hong Kong may benefit from a reduced profits tax rate of 5%, provided the company meets documentation and substance requirements.

FSIE-Linked Incentives

Under the new FSIE regime, businesses with genuine economic substance in Hong Kong can continue to enjoy exemptions for foreign-sourced dividends, interest, and disposal gains — ensuring that legitimate business activities remain tax-efficient.

Filing Profits Tax in Hong Kong

Every business carrying on trade, profession, or business in Hong Kong must file an annual profits tax return with the Inland Revenue Department (IRD). Staying compliant is crucial not only to avoid penalties but also to benefit from deductions, exemptions, and reliefs available under Hong Kong’s tax system.

Basis Period and Year of Assessment (YA)

Hong Kong taxes businesses based on a Year of Assessment (YA), which runs from 1 April to 31 March of the following year. For example, YA 2024/25 covers profits earned between 1 April 2024 and 31 March 2025.

Tax Return Forms

Different business entities file different profits tax return forms:

• Corporations (companies): BIR51
• Unincorporated businesses (sole proprietorships and partnerships): BIR52
• Non-resident businesses: BIR54
  

Supplementary forms (IR1478 & IR1479) may be required to report items such as preferential regimes, foreign-sourced income, and group elections under the two-tier system.

Filing Deadlines

The IRD typically issues profits tax returns on the first working day of April each year. Businesses generally have one month to file, though extensions are available:

• eTAX electronic filing: automatic one-month extension
• Block extension scheme (for tax representatives): deadlines vary by financial year-end (e.g., up to mid-November for March year-end companies)
  

Provisional Profits Tax

Because assessable profits can only be determined after the year ends, companies must prepay provisional profits tax based on estimated current-year profits. Later, when actual profits are assessed, any overpayment is refunded or credited to the following year.

Penalties for Non-Compliance

Failure to file on time or submitting inaccurate returns may result in:

• Estimated assessments by the IRD
• Surcharges of 10%–50% on late payments
• Fines up to HK$50,000 plus up to three times the underpaid tax
• In severe cases, imprisonment for deliberate evasion

Other Key Taxes in Hong Kong

While profits tax is the main form of corporate income tax in Hong Kong, businesses should also be aware of related tax obligations that may apply depending on their operations.

Salaries Tax

If you employ staff in Hong Kong, you are responsible for reporting remuneration and ensuring employees meet their salaries tax obligations. Salaries tax is imposed on income derived from employment in Hong Kong, either at progressive rates (2%–17%) or at a flat standard rate of 15%.

Withholding Tax

Hong Kong does not impose withholding tax on dividends or interest. However, royalty payments made to non-resident entities for the use of intellectual property in Hong Kong may be subject to withholding tax, usually calculated as a percentage of assessable profits.

Double Taxation Agreements (DTAs)

To prevent businesses from being taxed twice on the same income, Hong Kong has signed over 40 Comprehensive Double Taxation Agreements (CDTAs) with other jurisdictions.

What a DTA Covers

DTAs typically provide relief on:

• Dividends
• Interest payments
• Royalties
• Business profits
• Directors’ fees
• Shipping and airline income

Claiming Relief Under a DTA

To benefit from a DTA, companies must obtain a Certificate of Resident Status from the IRD. This requires proving that the business has sufficient management, control, and substance in Hong Kong.

BEPS 2.0 and the Global Minimum Tax

As global tax standards evolve, Hong Kong is adapting its profits tax regime to stay competitive while complying with international rules. One of the most significant changes on the horizon is the introduction of BEPS 2.0 (Base Erosion and Profit Shifting) and the global minimum tax framework.

What is BEPS 2.0?

BEPS 2.0 is an OECD-led initiative designed to ensure that multinational enterprises (MNEs) pay a fair share of taxes wherever they operate, particularly in jurisdictions with low or preferential tax rates.

Hong Kong’s Implementation Timeline

• From 2025 onwards, Hong Kong will apply a global minimum effective tax rate of 15% to large MNE groups with annual consolidated revenue of at least HK$6.3 billion (EUR 750 million).
  
• A Hong Kong minimum top-up tax will be introduced to ensure these groups meet the 15% threshold, even if they benefit from local tax incentives or preferential regimes.
  
• The government estimates this measure will generate an additional HK$15 billion in tax revenue annually starting from 2027–28.
  

Why It Matters for Businesses

For most small and medium-sized enterprises (SMEs), BEPS 2.0 will not apply, and the current profits tax rates remain unchanged. However, for multinational companies, this shift signals the end of ultra-low effective tax planning structures. Hong Kong businesses that are part of global groups should start reviewing their corporate income tax positions to prepare for compliance.

Conclusion

Hong Kong’s profits tax system offers one of the most competitive corporate income tax frameworks worldwide — low profit tax rates, no capital gains tax, and clear filing rules. With FSIE and BEPS 2.0 shaping compliance, businesses need to balance efficiency with proper documentation and planning.

At FastLane, we help companies navigate profits tax filing, optimize deductions, and stay compliant with international standards. Whether you’re a startup or multinational, our team ensures your tax position is both efficient and future-proof.

Contact FastLane today to simplify your profits tax compliance and maximize your tax strategy.

FAQs on Hong Kong Profits Tax

1. What is the profit tax rate in Hong Kong?

Hong Kong applies a two-tier profits tax rate. For corporations, the first HK$2 million of assessable profits is taxed at 8.25%, with the remainder taxed at 16.5%. For unincorporated businesses, the rates are 7.5% and 15%, respectively.

2. Who needs to pay profits tax in Hong Kong?

Any person or entity — whether a Hong Kong company or an overseas company carrying on business locally — must pay corporate income tax on profits derived from Hong Kong. The IRD does not distinguish between residents and non-residents.

3. Is offshore income taxable in Hong Kong?

Generally, no. Under the territorial tax system, only profits earned from Hong Kong business activities are subject to tax. However, under the FSIE regime introduced in 2024, certain passive income such as dividends, interest, disposal gains, and IP income may be taxable if received in Hong Kong unless substance requirements are met.

4. What deductions can businesses claim to reduce their profits tax liability?

Businesses can deduct operating expenses such as rent, salaries, professional fees, and charitable donations (up to 35% of assessable profits). They can also claim depreciation allowances for fixed assets and accelerated deductions for environmental protection and green technology investments.

5. What happens if I file my profits tax return late?

Late filing or non-compliance can result in:

• Estimated assessments by the IRD
  
• Penalties ranging from surcharges of 10%–50% on late payments
  
• Fines of up to HK$50,000 plus up to three times the underpaid tax
  
• In serious cases, imprisonment for deliberate tax evasion
  

6. Is Hong Kong considered a tax haven?

Although Hong Kong is sometimes called a tax haven due to its low profit tax rate and lack of taxes on capital gains or dividends, it operates a transparent, rules-based regime that complies with international tax standards, including FSIE and BEPS 2.0.