What is a profits tax in Hong Kong?
Profits tax is an equivalent to corporate income tax. Every company in Hong Kong must file a profits tax return with The Inland Revenue Department (IRD), along with the audited financial statements of the company. Individuals, sole proprietorships, partnerships and property owners are also required to file annual profits tax returns.
The IRD issues tax returns on 31st March each year to all persons and corporations required to file a tax return. Such persons and corporations should complete and file tax returns to the IRD within a month, together with any necessary documentation.
Extensions of time for lodgement can be requested – late lodgement (without the IRD granting an extension) will result in penalties being levied on the company. For newly incorporated companies, Profits tax returns are issued within 18 months of the business commencement date of companies in Hong Kong.
Year of assessment & corporate tax return
Year of assessment (YA) is the year that income is charged for companies. In Hong Kong, the YA is from 1 April to 31 March the following year.
The Inland Revenue Department (IRD) will issue tax returns and you must file the tax return together with submitting the required documents to the IRD. If the company is a newly registered business, the IRD will issue the profits tax return 18 months after the date of incorporation.
The company must file the following:
- A certified copy of the auditor’s report, balance sheet and profit & loss account
- A tax calculation showing how the amount of assessable profits
- Profits tax return form issued by the IRD
- Supplementary form from the IRD for your tax data and financial data
Small corporations may or may not be required to submit supporting documents with the profit tax return if they qualify as a small company defined by the IRD (has income for a basis period of not more than HKD 2 million.)
However, they should keep those documents and submit them if they are requested. A branch office in Hong Kong must file a profits tax return annually, and the IRD may request audited accounts of the foreign parent company to confirm the profit tax return of the branch office.
Profits tax rate and basis of taxation
There are two rates of tax for companies in Hong Kong. A percentage of 8.25% applies to profits up to HKD 2 million. The remaining profits is subject to a rate of 16.5%. For unincorporated businesses, a rate of 7.5% applies to profits up to HKD 2 million. After that, the rate is 15%.
In the year 2019/20, 100% of profits tax is waived, up to a maximum of HKD 20,000. This means that, effectively for a company, the first HKD 242,424 of profits is exempt from tax (HKD 242,424 x 8.25% = HKD 20,000).
For an unincorporated business, the effective tax exemption is on your first HKD 266,667 of profits (HKD 266,667 x 7.5% = HKD 20,000)
Two-tier tax profit regime
First HKD 2 million
More than HKD 2 million
Tax incentives available
Hong Kong has tax incentives on specific industries, such as air services, financial services and shipping. Income from qualifying debt instruments (QDI) issued before 1 April 2018 are subject to a concessionary tax rate of 50% of the standard profit tax rates, which depends on the maturity period of the QDI. QDIs issued after 1 April 2018 are exempted regardless of its maturity period.
Corporate treasury centres qualify to pay tax at a concessionary tax rate of 50% of the standard profit tax rates under certain conditions. Profits from qualifying aircraft leasing activities and aircraft leasing management activities conducted in Hong Kong are subject to a profit tax of 50% of the profit tax rates.
Hong Kong has also introduced tax incentives for qualifying R&D expenditures. The Inland Revenue (Amendment) (No.7) Ordinance 2018 (the Amendment) identified two types of deductible R&D expenditures:
- Type A – Qualified for 100% standard tax deduction
- Type B – Qualified for an enhanced two-tiered tax deduction at 300% for the first HKD 2 million and 200% for the remaining amount
Type A expenditures qualified for standard deduction
Type B expenditures qualified for enhanced deduction
Payments made to a college, university or a Designated Research Institution:
· For an R&D activity related to the business; or
· To conduct R&D activity related to the class of the business; or
Spending on any R&D activity associated with the taxpayer’s business, including capital expenditure except land or buildings,
Payments made to a Designated Local Research Institution:
· For a qualifying R&D activity associated with the business; or
· To undertake a qualifying R&D activity related to the business; or
· Regarding an employee engaged directly in; or
· On a consumable item used directly on a qualifying R&D activity relevant to the business
Designated local research institution refers to a university or college in Hong Kong that conducts qualifying R&D activities that are specified by the Commissioner for Innovation and Technology (CIT).
R&D activity is an activity that:
- Is related to natural or applied sciences to increase knowledge;
- Is experimental, investigative or systematic, for study related to business, market or management research;
- Is an original and planned investigation undertaken to gain new scientific or technical understanding; or
- Applies research findings or other new knowledge to plans or designs for producing or improving devices, materials, products, processes or services before they are commercially made.
Qualifying R&D activity only applies to activities (1), (3) and (4) that are conducted in Hong Kong, and excludes any activities not related to science or technology.
Calculating taxable income in Hong Kong
Step 1: Deduct non-assessable profits
Profits that are non-assessable include:
- Capital from the sale of capital assets
- Dividends or profits that profit tax has already been assessed
- Interest income from deposit in Hong Kong
Step 2: Deduct qualified business expenses
Expenses that are obtained from producing business income are deductible. These expenses include:
- Building or land rent
- Charitable donations
- Costs of buying patents, copyrights, trademarks and registered designs
- Expenses related with lending money
- Foreign taxes paid on income
- Repair, refurbishment, and replacement of machines or equipment expenses
- Research and development expenses
- Retirement scheme contributions
- Technical education fees
- Trademark and patent registration costs
Non-deductible expenses include:
- Domestic or private expenses, such as travelling fees to and from the place of business and the person’s residence
- Expenses that are not incurred in generating profit
- Improvement costs
- Other taxes paid (excluding employees’ salary tax)
- Other non-deductible expenses as listed in Section 17
- Payments for the benefits of spouses or partners
Step 3: Deduct >unutilised losses
Losses can be deducted from either the company’s income in the same assessment year or can be deducted from income in the following assessment years. In order to be deductible, the losses must have been from business conducted in Hong Kong.
Step 4: Add balancing charges
A balancing charge occurs when the sale of a capital asset is more than the written down value. To know what the balancing charges are, you must deduct the cost of the asset from the amount of capital allowances acquired.
Step 5: Deduct capital allowances
Capital allowances are the deductions that you can claim from the wear and tear on fixed assets such as land, buildings or equipment used to generate profit for your business. Tax deductions are available for capital expenditure sustained from the construction of buildings or structures and machinery and plant for trade or business purposes. The types of capital allowances are:
- Commercial buildings and structures
- An annual allowance of 4% of the capital expenditure sustained on construction is applied.
- Industrial buildings and structures
- An initial allowance of 20% in addition to the annual allowance of 4%.
- Plant and machinery
- An initial allowance of 60% is available on the capital expenditure.
Once all the listed deductions and additions have been completed, the company’s taxable income is made. One out of the two tax rates may be applied based on the suitability to determine the profits tax. The tax rate for corporations is 16.5% while the tax rate for unincorporated business is 15%.
Hong Kong’s low tax rate and special tax regimes for small companies and startups has enticed many foreigners around the world to invest in Hong Kong. Whenever you need help or advice regarding Hong Kong taxation, don’t hesitate to contact Acclime.