Widely known for its simple and low tax system, Hong Kong is one of the most business-friendly jurisdictions in the world. That being said, if you run a business in Hong Kong, be it a corporation, partnership, or sole proprietorship, you’ll still need to pay profits tax or corporate tax on profits arising from your business.
In this beginner’s guide, we’ll cover an overview of Hong Kong corporate tax and profits tax rates, other taxes, tax incentives, and how to file profit tax returns.
Hong Kong Corporate Tax Rate: an Overview
Hong Kong operates a territorial tax system that levies taxes on profits that are or are derived from Hong Kong, meaning that only profits from Hong Kong are subject to a profits tax. For foreign companies’ branches in Hong Kong, they are taxed like corporations.
In other words, corporations, partnerships, trustees, and groups of people carrying on a business, trade, or profession in Hong Kong are subject to taxes on profits sourced from Hong Kong. Foreign companies who carry on businesses in Hong Kong and derive income from Hong Kong are treated the same way as domestic companies.
Legally, a person’s tax residence is irrelevant, as there is no distinction between residents and non-residents when it comes to profits tax obligations. This accordingly means that profits generated from Hong Kong by non-residents are subject to taxation by Hong Kong law, unless said non-residents come from jurisdictions with which Hong Kong has a tax treaty.
Two-Tiered Profits Tax Rates Regime in Hong Kong
Hong Kong’s corporate tax, commonly called the profits tax, follows a two-tiered rates regime.
The profit tax rates are different for corporations and unincorporated businesses. By definition, corporations are legally separate and distinct entities from their owners, and are usually limited companies in Hong Kong. Unincorporated businesses do not possess a separate legal identity from their owner(s), and are usually sole proprietorships and partnerships.
The statutory profit tax rates of corporations and unincorporated businesses in Hong Kong are as follows:
- Corporation: for the first HKD 2 million assessable profits, the tax rate is 8.25%; the remainder of the assessable profits are subject to a 16.5% tax rate.
- Unincorporated business: for the first HKD 2 million assessable profits, the tax rate is 7.5%; the remainder of assessable profits are subject to a 15% tax rate.
Expenses incurred in the production of profits that are chargeable to tax are generally deductible. However, capital expenditure, in general, is not deductible. Capital expenditures are funds used by a company to acquire, maintain, and upgrade physical assets such as property, technology, or equipment.
Tax losses can be carried forward indefinitely and offset against future taxable profits from the same taxpayer. However, losses cannot be carried back or transferred to other taxpayers.
What are the other Taxes in Hong Kong?
In Hong Kong, there are only three direct taxes imposed. Other than profits tax, salaries tax are capped at 15% and property tax capped at 15%.
Hong Kong does not impose sales tax, VAT, withholding tax, capital gain tax, estate tax, or dividend tax. In addition, dividends paid from profits that have already been subject to Hong Kong tax are not taxable in the hands of shareholders.
Although Hong Kong does not impose a capital gain tax, gains on the disposal of assets may be subject to profits tax if the disposal constitutes a transaction in the nature of trade. For example, if you’re a company trading laptops, then gains on the disposal of laptops may be subject to profits tax.
Given such a tax-friendly system and the free trade policy, it’s much easier for businesses and companies to operate in Hong Kong compared to many other parts of the world.
How to File Corporate Tax / Profits Tax Return?
Every Hong Kong company must file an annual profits tax return issued (by mail) by the Hong Kong Inland Revenue Department (IRD) when conducting business.
Hong Kong’s tax year follows the fiscal year starting in April, not the calendar year from January to December.
Therefore, the IRD generally issues the profits tax return on the first working day of April every year. You must submit the return and required documents like a certified audit report within one month from the date of issue. However, you can apply for a two-week submission deadline extension, provided that you submit the profits tax return online. You could alternatively apply for an extension under the Block Extension Scheme.
If your company is newly incorporated, the IRD will issue the first profits tax return 18 months after incorporation to cover the first 18 months of your company’s operation.
The company would need to organize the business accounts and prepare them for submission to an auditor (a Certified Public Accountant) for review and filing with the government. After the accounts have been prepared and audited, the audit report and tax calculation with the profits tax return will be sent to the Inland Revenue Department.
In other words, corporations in Hong Kong will need an auditor’s help to file a profits tax return. Binery can help you coordinate with an independent auditor to provide comprehensive auditing services.
Hong Kong is one of the best places to conduct business given the low tax rates, attracting global entrepreneurs and businesses. However, as an entrepreneur, we understand thinking about taxes, accounting, and auditing is the last thing you want to do. At Binery, we help you get rid of the accounting tasks at an affordable budget, so you can focus on what you do best and grow your business!
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