Corporate income tax (profits tax) in Hong Kong explained.

Hong Kong’s two-tier profits tax regime, competitive rates and straightforward legislation collectively position it as one of the most attractive business environments in the Asia-Pacific region. Its corporate tax framework is notably distinct from many other jurisdictions, particularly due to its territorial basis of taxation and relatively simple structure.

This article outlines the key mechanics of profits tax in Hong Kong, including how taxable profits are calculated, the applicable rates and the deductions and incentives available to companies operating in the market.

What is the profits tax in Hong Kong?

Profits tax is Hong Kong’s equivalent of corporate income tax. Every company operating in Hong Kong is required to file a profits tax return with the Inland Revenue Department (IRD), along with audited financial statements. Individuals, sole proprietorships, partnerships and property owners are also subject to annual profits tax return requirements.

The IRD issues tax returns on 1 April each year to all persons and corporations required to file. Returns and any necessary documentation are typically due within one month of issuance. For the 2025/26 year of assessment, the IRD continues to offer filing extensions primarily through the Block Extension Scheme for taxpayers represented by tax representatives, as well as additional extensions in certain cases for electronic filing. Late lodgement without an approved extension may result in penalties.

For newly incorporated companies, the IRD typically issues the first profits tax return approximately 18 months after the date of incorporation or business commencement.

Year of assessment and tax return requirements

The year of assessment (YA) in Hong Kong runs from 1 April to 31 March of the following year. This is the period over which assessable income is calculated and charged.

Companies are generally required to file the following with the IRD:

• A certified copy of the auditor’s report, balance sheet and profit and loss account.
• A tax calculation showing the amount of assessable profits.
• The profits tax return form issued by the IRD.
• A supplementary form from the IRD for tax and financial data.

Small corporations, defined by the IRD as those with income of no more than HKD 2 million for a basis period, may not be required to submit supporting documents alongside their profits tax return. However, relevant documentation should be retained and produced if requested.

Branch offices in Hong Kong are required to file a profits tax return annually. The IRD may also request audited accounts of the foreign parent company to verify the branch’s profits tax return.

Profits tax rates

Hong Kong applies two rates of profits tax under its two-tier regime. For corporations, 8.25% applies to the first HKD 2 million of assessable profits, with the remainder subject to 16.5%. For unincorporated businesses, the corresponding rates are 7.5% and 15%.

Under the 2026/27 Budget, 100% of the 2025/26 profits tax is waived, subject to a ceiling of HKD 3,000 per case.

Tax incentives

Hong Kong offers a range of tax incentives targeted at specific industries and activities.

Income from qualifying debt instruments (QDIs) issued before 1 April 2018 is subject to a concessionary tax rate of 50% of the standard profits tax rates, with the applicable rate depending on the maturity period of the instrument. QDIs issued on or after 1 April 2018 are fully exempt regardless of maturity period.

Corporate treasury centres that meet certain conditions qualify for a concessionary profits tax rate of 50% of the standard rates. Profits from qualifying aircraft leasing activities and aircraft leasing management activities conducted in Hong Kong are also subject to profits tax at 50% of the standard rates.

R&D tax deductions

The Inland Revenue (Amendment) (No.7) Ordinance 2018 introduced enhanced tax deductions for qualifying research and development (R&D) expenditures. Two categories of deductible R&D expenditure are recognised:

• Type A – Qualifying for a standard 100% tax deduction.
• Type B – Qualifying for an enhanced two-tiered deduction of 300% on the first HKD 2 million and 200% on the remainder.

The expenditures which qualify as Type A and Type B expenditures are set out in the table below:

Calculating taxable income

Taxable income in Hong Kong is determined through a structured series of adjustments to gross profits.

Step 1: Deduct non-assessable profits

Certain categories of income are excluded from assessable profits. These include capital gains from the sale of capital assets, dividends or profits on which profits tax has already been assessed and interest income from deposits held in Hong Kong.

Step 2: Deduct qualified business expenses

Expenses incurred in producing assessable business income are generally deductible. These include building or land rent, charitable donations, costs of acquiring patents, copyrights, trademarks and registered designs, expenses related to lending money, foreign taxes paid on income, repair, refurbishment and replacement costs for machinery or equipment, R&D expenses, retirement scheme contributions, technical education fees, and trademark and patent registration costs.

Non-deductible expenses include domestic or private expenses, costs not incurred in producing assessable profits, improvement costs, other taxes paid (excluding employees’ salaries tax), payments for the benefit of spouses or partners, and other items listed under Section 17 of the Inland Revenue Ordinance.

Step 3: Deduct unutilised losses

Losses may be deducted from assessable income in the same year of assessment or carried forward to subsequent years. To be deductible, losses are required to arise from business conducted in Hong Kong.

Step 4: Add balancing charges

A balancing charge arises when the proceeds from the disposal of a capital asset exceed the asset’s written-down value. The charge is calculated by deducting the cost of the asset from the total capital allowances previously claimed.

Step 5: Deduct capital allowances

Capital allowances are available for wear and tear on fixed assets, such as buildings or equipment, used to generate assessable profits. The main categories are as follows. Commercial buildings and structures attract an annual allowance of 4% of the capital expenditure on construction. Industrial buildings and structures receive an initial allowance of 20% in addition to an annual allowance of 4%. Plant and machinery qualifies for an initial allowance of 60% on capital expenditure.

Once all adjustments are applied, the resulting assessable profits are taxed at the applicable rate: 16.5% for corporations or 15% for unincorporated businesses.

Conclusion

Hong Kong’s competitive tax rates, territorial basis of taxation and targeted incentive regime continue to make it one of the most business-friendly environments in the Asia-Pacific region. The 2026/27 Budget reinforces this direction, with further measures focused on technology and financial services, expanding the scope of available incentives and reducing the tax burden for qualifying businesses to strengthen Hong Kong’s position as an international innovation and business hub.

How Acclime can help with tax compliance and advisory in Hong Kong

Acclime provides comprehensive tax advisory and compliance services for companies operating in Hong Kong, including profits tax return preparation, R&D deduction assessments and ongoing IRD compliance support. Whether a business is newly incorporated or expanding its operations, Acclime can help navigate the Hong Kong tax landscape efficiently and accurately. Contact Acclime to discuss your tax requirements.