The main tax applicable to companies registered in Hong Kong is corporate income tax, commonly known as profit tax.
In this guide, we explain everything you need to know about Hong Kong profits tax, whether you reside in Hong Kong or overseas, and whether or not your company derives profit from Hong Kong.
Understanding Hong Kong’s Corporate Tax System
Hong Kong's Territorial Corporate Tax System
One primary advantage of operating a business via an HK company is linked to Hong Kong's “territorial tax” system, established under the Inland Revenue Ordinance.
This is a simple way of stating that an HK company is only required to pay tax on profits arising from its Hong Kong operations.
What Is the Offshore Profit Tax Exemption?
The consequence of Hong Kong's territorial tax system is that companies are not taxed on profits generated outside of Hong Kong.
Companies incorporated in Hong Kong but with no business and paying no tax there are commonly known as “offshore companies.”
Whether a company makes a profit out of a Hong Kong business is at the appreciation of the Inland Revenue Department and ultimately the courts.
Generally speaking, a company is eligible for the offshore status and profit tax exemption if:
- It has no customers or suppliers in Hong Kong.
- It does not sell products or services in Hong Kong.
- The products do not transit through Hong Kong.
- It is not managed from Hong Kong.
Corporate Tax Rates and the Two-Tier Tax System
How Do the Flat Tax and Two-Tier Corporate Tax Rates Work?
Hong Kong's corporate tax system is usually described as a “flat tax”. This is because the profits tax rate has for many years been fixed rather than progressive as in many other jurisdictions.
Hong Kong traditionally applied a single-tier tax system, whereby limited liability companies and unincorporated businesses were taxed on their profits at a normal profits tax rate of 16.5% and 15%, respectively.
The purpose of this new tax system is to support and attract more SMEs to Hong Kong.
Understanding the Two-Tier System
The two-tier system effectively introduces a concessionary profits tax rate. Its a reduced tax rate of 8.25% (50% of the 16.5% tax rate) for the first HKD 2 million profits generated by companies having business in Hong Kong.
Companies operating as a Qualifying Corporate Treasury Centre (QCTC) in Hong Kong can benefit from this concessionary tax rate. To qualify as a QCTC, a company needs to meet specific requirements set by the IRD.
Corporate Tax Rates Summary
In summary, companies having business in Hong Kong are now subject to the following profits tax rates under the two-tier tax system:
| Business Type | Profits up to HKD 2M | Profits above HKD 2M |
|---|---|---|
| Corporations with business in Hong Kong | 8.25% | 16.5% |
| Unincorporated businesses with business in Hong Kong | 7.5% | 15% |
| Corporations with no business in Hong Kong | 0% | 0% |
Some limitations were introduced to avoid abuses under the two-tier profits tax system. In the presence of a group of companies, only 1 is eligible for the two-tier profits tax regime. This means you cannot split the same business between several connected companies to artificially reduce your overall profits tax rate.
You should also know that for the year of assessment 2018/2010 a one-off reduction of profits tax by 100% was approved subject to a ceiling of HKD 20,000 per case. The same one-off reduction for the year of assessment 2019/2020 was passed by HK Legislative Council on 19 June 2020.
Please keep in mind that the above developments on the two-tier profits tax system apply to companies having business in Hong Kong (usually referred to as onshore companies).
No profit tax applies in Hong Kong for companies whose profits are derived from a business outside of Hong Kong (known as offshore companies).
Tax Filing and Compliance
Who Is Required to File Profits Tax?
- New Businesses: If your business is newly registered, you can expect to receive your initial profits tax form approximately 18 months after your business starts operations or from your incorporation date.
- Established Businesses: For companies that have been operating for a while, profits tax forms are typically distributed together on the first working day of April each year.
Overview of Profits Tax Returns
If you’re running a corporation or partnership, you’re required to file a profits tax return to report your business earnings. On the other hand, if you’re a sole proprietor, you’ll use the individual tax return form (BIR60) to report your profits.
There are three different forms you might end up using. You can check out sample forms online for an idea of what they look like, but don’t use those exact copies when you file. The options are:
• BIR51 for corporations
• BIR52 for entities that aren’t corporations
• BIR54 for non-resident individuals
If you want to send your tax return on paper, you must first fill out the forms on a computer, then print them and sign a Control List. The person who signs the tax return must also sign the Control List.
If you file online or use a mix of paper and online, you can use the Completion Service and Submission Service. These services automatically connect your uploaded files to your tax return using your profits tax file number and RIN.
When Should You Submit Your Company's Profits Tax Return Form (BIR51)?
Each year, any HK company normally receives a Profit Tax Return Form (BIR51) from the Hong Kong Inland Revenue Department.
The deadline to fill in and submit your company's Profit Tax Return Form is normally May 2nd.
However, you may apply for an extension (unless your company closes its financial year between 1st of April and 30th of November). The Profit Tax Form (BIR51) is issued on April 1st every year.
Here is a breakdown of filing deadlines and tax payment based on your financial year end:
| Financial Year End | BIR51 Submission Deadline | Extension Deadline | Tax Payment Deadline |
|---|---|---|---|
| April – November | May 2nd | N/A | As notified by IRD (typically between November and April of the following year) |
| December | N/A | May 15th | As notified by IRD (typically between November and April of the following year) |
| March | N/A | November 15th | As notified by IRD (typically between November and April of the following year) |
What Documents Must Be Submitted for the Profit Tax Assessment?
Each year, your company needs to prepare and submit the following documents to the Inland Revenue Department as part of the profits tax assessment:
- The profits tax return (BIR51) form received from the Inland Revenue Department
- A supplementary form relating to your company's tax and financial data
- A certified copy of your company's auditor report, balance sheet, profit, and loss statement
- A tax computation with the calculation of the profit or loss for the relevant financial year
If your company has not yet started to do business, then you are still required to fill in and submit a Nil Profit Tax Return.
Can My Company Be Exempted from Preparing Audited Financial Statements?
If your company's gross revenue for any given financial year does not exceed HKD 2,000,000, then you are not required to file its audited accounts with the Inland Revenue Department.
But note that the preparation of audited accounts is mandatory even if your company's gross income is below HKD 2,000,000, and the authorities may ask you to present such accounts at any time.
The preparation of annual audited accounts is, however, not required in the following circumstances:
- Dormant company: A company is exempted from the obligation to prepare annual audited accounts when (i) it has no accounting transaction for a relevant financial year and (ii) it has declared its dormant status to the Hong Kong Companies Registry
- Hong Kong branch: The Hong Kong branch of a foreign company is not required to prepare an annual audited account if it provides the following information to the Inland Revenue Department
It will be wise to keep accurate accounting records even if your company qualifies for exemption.
Tax Deductions and Incentives
How Do You Reduce Your Hong Kong Profits Tax Rate?
The Hong Kong profit tax system allows you to deduct various expenses from your company's total turnover. This helps reduce its net assessable profit (meaning the profit that will be subject to tax) and ultimately the tax your company pays.
Most expenses incurred by the company for the needs of its business operations are deductible.
This notably includes:
- Rental for office and other real properties
- Client and supplier entertainment expenses
- Professional travel expenses
- Salaries and director fees
As opposed to many jurisdictions, there is no cap on such expenses as long as they were effectively engaged in the context of your company's business operations.
What Tax Incentives Are Available in Hong Kong?
Hong Kong offers some neat tax breaks for certain industries like air services, financial services, and shipping. For example, if you have qualifying debt instruments (QDIs) that were issued before April 1, 2018, you only pay half the regular profits tax rate—how much you pay depends on the maturity of the QDI. But if your QDIs were issued after that date, they’re completely tax-free, no matter how long they run.
There are also special benefits for corporate treasury centres, which can get taxed at just 50% of the usual rate if they meet certain conditions. And if your business earns money from aircraft leasing or managing those leasing activities in Hong Kong, you’ll also enjoy that half-rate tax.
Now, when it comes to research and development (R&D), Hong Kong has some attractive incentives too. Under a 2018 amendment, R&D expenses are split into two groups:
| R&D Expense Type | Tax Deduction | Applicable Conditions |
|---|---|---|
| Type A | 100% tax deduction | Applies to certain Qualifying Debt Instruments (QDIs) issued before April 1, 2018, with shorter or medium-term maturities. The tax benefit is provided by charging only half the standard profits tax rate on the interest income, depending on the instrument’s maturity. |
| Type B | Two-tier deduction: 300% for the first HKD 2 million and 200% for amounts beyond that | Applies to QDIs issued after April 1, 2018. These instruments are fully tax-exempt on interest income, regardless of maturity. Encourages new, long-term debt financing under favorable tax conditions. |
What counts as R&D spending? You can claim deductions for payments to colleges, universities, or designated research institutions if the work is related to your business. This includes most of your R&D expenses (even some capital costs, as long as they’re not for land or buildings), costs for employees directly involved in research, and even consumables used in your R&D projects.
A “designated local research institution” means a Hong Kong-based college or university approved by the Commissioner for Innovation and Technology to carry out qualifying R&D work.
For the R&D to qualify, it should be about boosting scientific or technical knowledge—whether that is through experimental studies, planned investigations to gain new insights, or applying new findings to improve or create products, processes, or services before they hit the market.
And only the R&D activities done in Hong Kong that fit these criteria (apart from general business research) will be eligible for these tax incentives.
Calculating and Paying Hong Kong Profits Tax
How to Calculate Taxable Income in Hong Kong
Step 1: Remove Non-Taxable Income
First, you need to subtract any income that isn’t taxable. This means you take out amounts from things like selling capital assets, dividends or profits that have already been taxed, and any interest you earn from deposits in Hong Kong.
Step 2: Subtract Your Business Expenses
Next, deduct the expenses that directly help you earn income. This can include costs like rent for your building or land, charitable donations, fees for acquiring intellectual property (like patents, copyrights, trademarks, or registered designs), expenses related to lending money, any foreign taxes paid on your earnings, costs for repairing or replacing equipment, research and development expenses, contributions to retirement schemes, fees for technical education, and registration costs for trademarks or patents.
On the other hand, you can’t deduct personal expenses such as travel between your home and workplace, costs that aren’t linked to generating income, improvement expenses, certain other taxes (other than employee salary tax), expenses specifically disallowed under Section 17, or payments made for a spouse or partner's benefits.
Step 3: Factor in Unused Losses
If your business has incurred losses from operations in Hong Kong, you can deduct those losses from your income in the same year, or even carry them forward to reduce income in future years.
Step 4: Add Balancing Charges
A balancing charge comes into play if you sell a capital asset for more than its depreciated (written down) value. Essentially, you calculate it by subtracting the asset’s cost from the total capital allowances you’ve claimed.
Step 5: Claim Capital Allowances
Lastly, you can claim deductions for the wear and tear of your fixed assets (like land, buildings, or equipment) that are used to generate business profits. For example, if you’ve spent money on constructing buildings or buying machinery, you’re eligible for deductions:
- Commercial properties: You get a yearly deduction of 4% of the construction costs.
- Industrial properties: You receive an initial 20% allowance along with the 4% annual deduction.
- Plant and machinery: You can claim an initial 60% allowance.
Once you’ve worked through all these adjustments, you arrive at your final taxable income. After that, you'll apply either a 16.5% tax rate if you’re a corporation or a 15% rate if you're running an unincorporated business.
When Should Profits Tax and Provisional Profits Tax Be Paid?
Profits tax shall be paid as notified by the Inland Revenue Department, generally between November of the year in which your company's Profits Tax Return is received in April of the following year.
As profits tax is paid after the end of the relevant financial year, your company is required to pay in advance each year an estimated tax (known as provisional profits tax) based on its profit for the previous financial year.
The provisional profits tax is payable in two installments, of respectively seventy-five percent (75%) of the requested amount, and twenty-five percent (25%) three months later.
If the provisional profits tax paid by your company is higher or lower than the actual profits tax due for the relevant financial year, a subsequent adjustment will take place.
Can Losses of Previous Years Be Carried Forward?
Losses suffered by your company during a financial year can be carried forward and offset against future profits.
However, losses cannot be carried backward and be used to reduce past profits.
Profits tax in Hong Kong is assessed and paid at the company level, with no possible transfer or pooling of losses between companies of the same group.
Avoiding Double Taxation and Compliance Risks
How Can I Avoid Double Taxation Between Hong Kong and My Country of Residence?
Hong Kong has a territorial tax system and only taxes profits generated in Hong Kong.
This means your company will not be taxed in Hong Kong for profits derived from business outside of Hong Kong. Besides, Hong Kong has signed double-tax treaties with many jurisdictions to reduce or eliminate the risks of double taxation.
What Are the Consequences of Not Filing Your Profit Tax Return (BIR51)?
Failure or delay in filing profit tax returns may lead to progressive penalties. In some cases, the IRD may resort to criminal prosecution. The IRD will also estimate your profits and assess tax based on that estimate, potentially leading to a higher tax bill.
Final Thoughts: Get Expert Help with Your Hong Kong Taxes
An accountant can help you understand Hong Kong tax rules and lower your tax burden.
At Air Corporate, our experienced accountants specialize in guiding businesses through Hong Kong's tax system. We can help you meet all tax requirements while reducing your tax liability.
