Profit Tax Computation for Hong Kong Company

Corporate tax (also called profits tax in Hong Kong) is based on the assessment of companies’ profits. The assessable profit is a result of income and deduction adjustments to the net profit and loss account of the taxable period. This article will cover several aspects that need to be considered for the determination of the taxable income of Hong Kong companies and profit tax computation.

Understanding Hong Kong’s Two-Tier Profit Tax System 

Hong Kong is a territorial-based taxation which means only profits derived from activities carried out in Hong Kong are subject to profits tax.The Two-Tier Profits Tax System was introduced to enhance Hong Kong’s competitive business environment by providing tax relief, particularly for small and medium-sized enterprises (SMEs).  SMEs form the backbone of Hong Kong’s economy, and this tax system directly supports their development by easing financial pressures. With a two-tiered profits tax rate system,  businesses can retain more working capital which makes it easier to cover operational costs, expand services, and invest in new opportunities.

Who Qualifies for Two-Tier Rates?

Every corporation, partnership, and sole proprietorship, except those already exempt from tax, qualifies for the Two Tier Tax Rates Regime. In this case, businesses whether they are large or small in any of the industries that are eligible can enjoy the tax relief that the system provides.

But to benefit from the lower profits tax, businesses must meet certain requirements. For instance, the total gross income of the business must not be above HK$500 million. So the tax relief is limited to SMEs as they are generally considered to be businesses with a lower turnover.

Businesses also need to meet certain conditions related to their business activities:

• They can’t perform any activities that are not regarded in accordance with Hong Kong law as “trade, profession, or business”.
• They can’t engage in any remunerated activities outside of Hong Kong. However, there are some exceptions.

Key Features of Profit Tax in Hong Kong

Profit Tax Return Forms in Hong Kong

The Inland Revenue Department (IRD) categorizes profit tax return forms into three series:

For more information about the forms, please check this article
Hong Kong Tax Return Guide: Profits Tax Return (BIR51 / BIR52 / BIR54)  

These forms are specific to business structures, ensuring accurate reporting and compliance with Hong Kong’s tax regulations.

Supplementary Forms to Profit Tax Returns

For the 2022/23 assessment year, the IRD introduced supplementary forms to capture additional reporting requirements, including:

Submission Process:

• These forms must be completed electronically.
• If filing in paper form, you must print, sign, and include the Control List with your profits tax return.
• For electronic or semi-electronic filing, the Completion Service and Submission Service link uploaded data files with the tax return using the same profits tax file number and RIN.

What Is the Profits Tax Rate In Hong Kong?

If a company fulfills specific conditions outlined in the FSIE, it qualifies for tax exemption.

Under Hong Kong’s law,  a company’s income includes: 

• Earnings generated from conducting business activities within Hong Kong
• Payments received for the use of intellectual property rights
• Income generated from leasing movable property
• Interest earnings
• Financial support in the form of grants, subsidies, or other assistance
• Profits gained from bills of exchange or certificates of deposit
• Reimbursements of contributions made to retirement schemes
• Revenue from the exhibition or utilization of films, tapes, or recordings

The next step is to apply the following modifications to the net income of the company to reach the taxable income.

Step 1: Deduct Non-assessable Profits for Profit Tax Computation

As for the profits of inconvertible character, they are deducted from the company’s net income. Profit tax computation for non-assessable profits include:

• Earnings not originating from or generated in Hong Kong
• Proceeds from the sale of capital assets
• Dividends or profits already subjected to profits tax assessment
• Interest earnings from deposits made in Hong Kong, excluding those received by financial institutions
• Other exempt receipts as stipulated in the Hong Kong Inland Revenue Ordinance

Step 2: Deduct Qualified Business Expenses for Profit Tax Computation

The amount of money spent to make business income from production can be offset against the revenue. Examples of profit tax computation for deductible income include: 

• Costs associated with obtaining loans
• Rental payments for the use of buildings or land for profit-making activities
• Foreign taxes paid on income subject to foreign tax
• Debts deemed uncollectible and written off
• Expenditure on repairing, refurbishing, or replacing machinery, equipment, premises, or items utilized for profit generation
• Costs related to trademark and patent registration
• Contributions to retirement schemes (within specified boundaries)
• Research and development expenses covering feasibility studies, market research, innovation in product design, business or management research, etc.
• Fees for technical education
• Approved charitable donations
• Acquisition expenses for patents, know-how, registered trademarks, copyrights, and registered designs
• Capital outlay on designated fixed assets (subject to limitations)
• Investment in environmental protection machinery

Non-deductible expenses include:

• Personal or household expenditures
• Costs not related to profit generation
• Expenditure on property or asset enhancements
• Amounts reclaimable under insurance policies
• Taxes paid other than employees’ salary tax
• Specified capital expenses or losses categorized as “non-deductible” under Section 17 of the Hong Kong Inland Revenue Ordinance
• Payments made to or for the benefit of spouses or partners
• Expenses associated with premises not utilized for profit-generating activities

Step 3: Deduct Unutilized Losses for Profit Tax Computation

A loss can either be deducted from the income in that same assessment year or carried over to subsequent assessment years and deducted from income in those years. For losses to be deductible, they have to originate from Hong Kong where the business is carried out.

However, a correction factor is applied for profit tax computation when the unabsorbed losses incurred from concessionary trading receipts (trading receipts subjected a concessionary rate of tax) are set off against normal trading receipts (trading receipts subjected a normal rate of tax) and vice versa.

Step 4: Add Balancing Charges for Profit Tax Computation

For profit tax computation, a balancing charge occurs when the sale proceeds of a capital asset (like building, structure, plant and machinery) is more than the Written Down Value (cost of the asset deducted from the capital allowances that have previously been claimed).

Step 5: Deduct Capital Allowances for Profit Tax Computation

Under the Hong Kong tax regulations, the profit tax computation for capital depreciation and spending on fixed assets purchased are deemed as non-deductible expenses as per tax purposes. On the other side, reliefs through capital allowance are available which covers the initial capital expenditure and the annual depreciation for wear and tear. The tax deductions are available for the business premises and for the plant and machinery used in the generation of profits. The various types of capital allowances are as follows:The various types of capital allowances are as follows:

• A 20% initial allowance is provided for capital expenses related to constructing industrial buildings or structures.
• An annual allowance of 4% of the initial capital expenditure is granted for the construction of industrial or commercial buildings.
• For renovation or refurbishment costs of business premises, 20% of the capital expenditure is deductible in equal portions over 5 years, starting from the year of expenditure.
• There’s a 60% initial allowance for capital expenses on plant and machinery incurred in the relevant year.
• Annual depreciation allowance is applicable to plant and machinery based on reducing value, with depreciation rates ranging from 10% to 30%, depending on the type of equipment.
• For environmental protection installations in commercial or industrial buildings, 20% of the capital expenditure is deductible in equal portions over 5 years, starting from the year of expenditure.
• Special provisions are in place for plant and machinery under sale and leaseback arrangements.
  

Following on from the above mentioned deductions and additions, the company’s taxable income can be calculated. Tax rate, which is applied to this income, determines the profits tax. The standard profits tax rate for corporations is 16.5% on assessable profits and 15% on assessable profits for unincorporated businesses.

Profits Tax Deadlines In Hong Kong

After incorporation, the Hong Kong Inland Revenue Department (IRD) typically issues the first Profits Tax Return (PTR) 18 months following the date of incorporation. However, companies are obligated to notify the IRD if they have assessable profits even if no PTR is received.

Each Year of Assessment (YA) spans 12 months, with the tax return filing deadline determined by the company’s financial year-end. The deadline to file its annual tax return and financial statements for each assessment year is determined by the month that the accounting year ends. Here are the standard tax filing deadlines:

Key Considerations in Preparing Your Profits Tax Filing

Taxable profits are not accounting profits. Some adjustments have to be made for tax exemptions, depreciation allowances, and disallowed expenses. Here are some examples:

• Tax-exempt income: Offshore profits, capital gains, bank interest, and dividends.
• Non-deductible expenses: Inter-company interest and certain foreign charges unless qualifying intra-group financing conditions are met.
• Depreciation allowances: 100% first-year write-offs for specified assets like computers, manufacturing equipment, and environmentally friendly vehicles.

The current Profits Tax rate for corporations is 16.5%, while a two-tiered tax rate applies to the first HKD 2 million of profits (at 8.25%) for qualifying entities. Hong Kong also levies withholding taxes on:

• Royalties paid to overseas entities (generally at 4.95%)
• Sales through Hong Kong consignment agents by non-residents (0.5% of gross proceeds)

Hong Kong Profits Tax Legislation Updates (2023–2024)

Between 2023 and 2024, Hong Kong introduced several key updates to the profits tax legislation These changes impact businesses operating in Hong Kong and multinational corporations with operations in the region. Here is the breakdown of the major legislative updates and their implications.

1. Expansion of Specified Foreign-Sourced Income (Effective 1 Jan 2024)

• New amendments cover disposal gains beyond equity interests. Offshore interest, dividends, disposal gains, and IP income are deemed Hong Kong-sourced if received in Hong Kong by an MNE that does not meet specific exemption criteria.
• Exemptions:
  • Interest & non-IP disposal gains: Economic substance test
  • Dividends & equity disposal gains: Economic substance or participation test
  • IP income and IP disposal gains: Nexus requirement

2. Onshore Disposal Gain Concession (Effective 1 Jan 2024)

• The Inland Revenue (Amendment) (Disposal Gain by Holder of Qualifying Equity Interests) Ordinance 2023 introduces tax relief for qualifying equity disposals under the Enhancement Scheme.

3. Foreign-Sourced Income Exemption (FSIE) Regime Enhancements

• Non-equity asset disposal gains are now also covered.
• Reflects ongoing alignment with international tax standards to prevent base erosion.

4. Stamp Duty Reductions (Effective Late 2023)

• Stock transfers: Rate reduced from 0.13% to 0.1% for both buyer and seller.
• Residential properties: Holding period for Special Stamp Duty shortened from 36 to 24 months and rates also reduced.

5. Insurance (Amendment) Ordinance 2023

• Introduced a risk-based capital regime for authorised insurers, enhancing regulatory stability.

6. Tax Concessions for Family Investment Holding Vehicles (FIHVs)

• A 0% profits tax rate on qualifying and incidental transactions (within a 5% threshold), effective retroactively from 1 April 2022.

Effective from 1 January 2023, under the refined FSIE regime, four types of offshore income:

• (i) interest
• (ii) dividends
• (iii) disposal gains from the sale of equity interests (equity interest disposal gains), and
• (iv) IP income (collectively, ‘specified foreign-sourced income’) 

are deemed to be sourced from Hong Kong SAR and chargeable to profits tax if the income is received in Hong Kong SAR by a multinational enterprise (MNE) entity carrying on a trade, profession, or business in Hong Kong SAR (irrespective of its revenue or asset size) and the recipient entity fails to meet a relevant exception from the deeming provision. 

Starting from the year 2018/19, Hong Kong SAR has moved to a two-layer profits tax rates regime. The following table shows the applicable tax rates for corporations and unincorporated businesses:

* The anti-avoidance strategy is to ensure that a ‘group of connected entities’ will nominate only one member of this group that will benefit from the two-tiered tax rates for a specific year of assessment.

For those industries which have special rules to determine the tax liabilities, examples are shipping, air services and financial services. A special tax framework for Islamic bonds (i.e. sukuk) has also been developed to make sure that sukuk and their conventional counterparts are subjected to the same tax treatments.

Profits from certain debt instruments (QDIs) issued before 1 Apr 2018 may be either tax exempt or taxed at concessionary rates (that is, effective rates of 50% of regular profits tax) depending on the issue date and the maturity period of the QDIs. Incomes arising from the qdis issued on or after 1 April 2018 are tax exempted, regardless of maturity period, provided that the conditions are met. It is worth noting that this concessionary tax rate is not necessarily applicable to the income generated from qualified domestic income (QDI) by an individual if this person is a connected person of the issuer / namely, the person acquiring the QDI.

In this regard, public funds that are regulated by the Securities and Futures Commission of the Hong Kong SAR and similar funds that are subject to an acceptable supervisory authority and regulations, are exempted from Hong Kong profits tax. Effective from 1 April 2019, both onshore and offshore privately offered funds are exempted from Hong Kong profits tax on profits derived from the specified transactions that are carried out by the ‘Specified Persons’ (i.e., SFC licensed fund managers) or the funds are qualified as ‘Qualified Investment Funds’ defined under the law. The specific anti-avoidance provisions in the IRO are such that it is deemed that certain residents are subject to the profits tax on their share of the non-resident person’s tax-exempt earnings.

Income generated from the reinsurance of onshore risks, onshore and offshore captive insurance business is taxed at the concessionary rate of 8.25% (which is half the usual profits tax rate). General reinsurance business profits of direct insurers, general insurance business profits (certain types) of direct insurers and certain insurance brokerage business profits of licensed insurance brokers, are also exempted from profits tax at a concessionary rate of 8.25% (or 50% of the normal rate) effective from 19 March 2021.

Profits of a qualify corporate treasury center which satisfy certain conditions are subject to profits tax at a concessionary tax rate of 8,25% (which is half of the regular profits tax rate)

Profits earned from qualifying aircraft leasing and qualifying aircraft leasing management activities conducted in Hong Kong SAR are subject to profits tax concessionary tax rate of 8.25% under specified conditions. Moreover, the taxable net lease payments consists of the 20% of the gross lease payments of an aircraft lessor minus the deductible expenses with the exception of the tax depreciation allowance.

Effective from 1 April 2019, qualifying profits from the qualifying ship leasing activities carried out in Hong Kong SAR are subject to profitable tax at zero percent and qualifying profits from the qualifying ship leasing management activities carried out in Hong Kong SAR are subject to profitable tax at zero percent (for the associated corporations) or 8.25% (for non-associated corporations), subject to certain

Effective 1 April 2022, qualifying profits generated from qualifying shipping activities, namely ship agency, ship management, or ship broking activities conducted in HKSAR will be exempt from tax or a concessionary profits tax rate of 0% or 8.25% provided stipulated conditions are met.

Qualifying participant’s carried interest, or the carried interest received by a qualifying recipient on or after 1 April 2020, on investment management services provided in Hong Kong SAR for a certified investment fund may be eligible for a concessionary profits tax rate of 0%, if the specified conditions are met.

An FIHV that is eligible and is managed by an ESF Office in the HKSAR, for the profits taxable on or after 1 April 2022, from the qualifying transactions and incidental transactions (being within 5% threshold), will be subject to profits tax at a concessionary tax rate of 0% under the conditions stipulated.

The concessionary tax treatments under the following special tax regimes will be available only if the taxpayer has substantial activities in Hong Kong SAR in terms of the number of qualified employees and amount of operating expenditure, which must be adequate in the opinion of the Commissioner of Inland Revenue (CIR) and, in any event, not lower than the minimum thresholds as set out further below:

• Corporate treasury centers.
• Reinsurance business.
• Captive insurance business.
• Specific insurance services such as general insurance business.
• Specific lines of insurance agency
• Lessors of aircraft and aircraft leasing managers.
• Lessor-shippers and ship leasing officers.
• Shipping operations.
• Certain shipping-related activities.
• Brought in provisions for investment management services at qualified levels.
• FIHVs.

For the concessionary tax regimes on ship leasing and certain shipping-related activities, the minimum threshold requirements during the basis period for a year of assessment are as follows:

For the insurance business concessionary tax regimes, the minimum threshold requirements during the basis period for a year of assessment are as follows:

For the carried interest tax concession for the provision of qualified investment management services, the minimum threshold requirements during the basis period for a year of assessment within the applicable period (i.e. from the day on which the qualifying recipients began to perform investment management services to the fund to the day on which the carried interest was received by, or accrued to, the qualifying recipients) are as follows:

For the FIHV concessionary tax regime, the minimum threshold requirements during the basis period for a year of assessment are as follows:

Thus far the CIR has not given out the threshold requirements for other concessionary tax regimes by a gazette notice.

Compliance With Two-tiered Profits Tax Rates Regime

The two-tiered tax rates regime is a web of regulations that governs how companies are charged for their use of resources in Hong Kong. If you want to stay compliant and avoid stacking up penalties, make sure you understand the rules of the regime. Like many places, Hong Kong is big on its tax evasion penalties.

One of the key rules of the Two Tier Tax System concerns companies that are jointly charged when multiple people have teamed up to open a company. That means they are all in it together when it comes to paying taxes, so no one can choose what they pay. So make sure every member of the venture shares the responsibility for the tax you’re liable to pay.

Imagine you’re operating from out of Hong Kong, but you’re based in Hong Kong, you can still make use of the Two-Tier System, as long as you meet certain requirements. It  is like a business that uses the roads and resources of a country but doesn’t pay anything for the maintenance costs which seems unfair. Therefore, the goal of the Two-Tier System is not to punish companies based on their operations but to ensure that companies engaged in business in Hong Kong pay their fair share for the resources they use, no matter where they operate.

The Two-Tier System in Hong Kong comprises power, gas, water, and waste management resources. Therefore, companies have to monitor closely how much data they use to avoid unpleasant surprises.

Key Restrictions To Consider Before Choosing Two-Tiered Tax Rates

While the Two-Tiered Tax Rates Regime gives a significant 50% reduction in profits tax liability, companies should consider its specific restrictions.

One key limitation is that eligibility criteria are subject to change each year. So, the companies must stay updated on the latest requirements and ensure compliance with any adjustments to benefit from the regime.

Additionally, the regime operates within Hong Kong’s transfer pricing regulations which means businesses have to follow the compliance rules to avoid potential penalties or legal issues.

Another important consideration is that this tax system primarily benefits local Hong Kong SMEs. Companies registered outside of Hong Kong may not be eligible, though foreign businesses with a subsidiary or a permanent establishment in Hong Kong can still take advantage of the lower tax rate.

Lastly, the regime applies only to assessable profits, excluding capital gains or earnings from selling capital assets. If a company’s profits largely stem from these sources, the tax benefits of the regime may be minimal.

To decide whether this tax plan aligns with your business goals, consider seeking professional advice. While the Two-Tiered Tax Rates Regime offers substantial tax savings, its suitability depends on your company’s financial structure and long-term objectives.

Should More Entities Use Two-Tiered Profit Tax Rates?

Yes. More and more businesses should take advantage of the two-tiered tax rates regime given that their businesses comply with the inland revenue authority’s requirements. This tax relief was created to promote the growth and competitiveness of the small and medium-size enterprises in Hong Kong which will help more businesses to benefit from the country’s financial stability.

Beyond Two-Tier Tax Rate: Special Tax Regime For Specific Industries 

Hong Kong offers concessionary tax rates for certain industries and activities, further promoting specific sectors. Some notable examples include:

Concessionary Tax Rates – Tailored Benefits

The shipping and airfreight industries qualify for a concessionary profits tax rate of 8.25%.

Patent Box Regime: Boosting Innovation

This regime offers a lower tax rate on profits derived from qualifying intellectual property (IP).

Family-Owned Investment Holding Vehicles: Structuring for Success

Properly structured family-owned investment holding vehicles can benefit from tax advantages on dividends and capital gains.

Beyond Two-Tier Tax Rate: Special Tax Regime For Specific Industries 

Hong Kong offers concessionary tax rates for certain industries and activities, further promoting specific sectors. Some notable examples include:

Concessionary Tax Rates – Tailored Benefits

The shipping and airfreight industries qualify for a concessionary profits tax rate of 8.25%.

Patent Box Regime: Boosting Innovation

This regime offers a lower tax rate on profits derived from qualifying intellectual property (IP).

Family-Owned Investment Holding Vehicles: Structuring for Success

Properly structured family-owned investment holding vehicles can benefit from tax advantages on dividends and capital gains.

How Can Fastlane Help You with Profit Tax Computation?

FastLane Group specializes in Hong Kong profit tax, accounting, and tax filing, which address specific individual needs. Contact us now for guidance FastLane is here to help!