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How Can Startups Prepare for Tax Planning?

Get ahead with tax planning as a startup in Hong Kong through our introduction to Hong Kong's tax system.

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Guest Post by: Regina Janelle

Hong Kong is considered a very interesting place to invest, especially if you’re venturing into the Food and Beverages (F&B) industry with lower taxes in mind. Not only does the city host a plethora of cuisines, it’s also considered one of the world’s freest economies, with well-established banking and legal institutions, as well as very reasonable tax rates. While SCMP reports that there is a high business startup cost to get your foot in the door, most foreign companies still flock to HK for these low taxes, growth prospects, and access to China.

One way to mitigate potential F&B investment costs is through tax planning, which is the process of evaluating your startup’s finances from a tax perspective and making sure you pay the most efficient tax possible. While taxes in Hong Kong are quite cheap, tax planning does allow you to better manage your income and save more money, given the tight profit margins in the restaurant industry. Moreover, tax obligations can get quite complicated as your business grows. This is why many startups turn to a qualified team of accounting professionals like auditors, budget analysts, and financial advisors for business-specific tax planning guidance. In fact, the large demand for these experts has led to a growth rate of 4% in the accounting industry.

Of course, it’s better for any business owner to keep themselves well-informed with financial management, even if you have accountants on board. In this article, we’ll present a general guide on the basics of tax planning as a Hong Kong startup:

Study Hong Kong’s tax system

Before you begin the tax planning process, you should familiarize yourself with Hong Kong’s tax regime. As we mentioned in our post on corporate tax and profits tax rate, the Inland Revenue Department (IRD) works using a territorial two-tier profit tax system, where only profits from Hong Kong are subject to a profits tax. There is no distinction between resident and non-resident companies.

For corporations, the tax rate is 8.25% on the first HKD 2 million assessable profits. This is really good for startups and other small businesses, as the rate is lower compared to most countries. The remainder of assessable profits is subject to a 16.5% tax rate. For unincorporated businesses, the first HKD 2 million assessable profits are taxed at 7.5%, while the remainder is taxed at 15%. Other than profits tax, you’ll only need to pay salary and property taxes in tax-friendly HK, which are capped at 15%.

Get organised as early as possible

Every Hong Kong business is required to submit audit reports to the government every year. A full set of accounts include the following: Profit & Loss Accounts, Balance Sheet, General Ledger, and Trial File. This is why preparing to file taxes can be a year-long process. You’ll need to keep track of all expenses or deductions your startup plans to claim, which should be verifiable in your recordkeeping of every receipt and invoice received throughout the year.

Plus, you need to organize all your accounts and audit reports so you auditors can assess and create an effective tax plan. Without accurate and updated financial statements, it will be difficult to provide a clear strategy on profit margins, liquidity, and operating revenue.

Find ways to get legal tax exemptions

Effective tax planning means analyzing your startup’s finances to ensure the lowest tax possible while staying compliant. A tax-compliant, healthy startup is preferable for global investors, so you should look for legal exemptions and deductions. There are many opportunities you can easily miss. For instance, HK announced in February 2022 that it will offer tax breaks and handouts to small businesses to mitigate recent stringent COVID19 restrictions. This break comes at a 100% reduction in profits tax capped at HKD 10,000.

Without accounting support, it’s easy to miss out on exemptions your business is entitled to. The key is to work with accountants who can help you navigate new laws and changing allowances imposed by the IRD. Binery is the leading cloud bookkeeping firm you need. Our team of tech-savvy accountants can help you handle receipts, send financial statements, and fix your books. Contact us today to learn more about Binery’s premium services.

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