One of the primary reasons why a growing number of businesses have chosen Hong Kong as the place to set up their company is a very attractive tax regime.
Hong Kong has no VAT or consumption tax. Hong Kong does not levy tax on capital gains if you sell your company or business.
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 your HK company’s profits tax, whether you reside in Hong Kong or overseas, and whether or not your company derives profit from Hong Kong.
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.
This is a simple way of stating that an HK company is only required to pay tax on profits derived 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
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 fixed rates of respectively 16.5% and 15%.
This has changed since the assessment year 2018/2019 with the introduction of a two-tier profits tax system.
The purpose of this new tax system is to support and attract more SMEs to Hong Kong.
The two-tier system effectively introduces a reduced tax rate of 8.25% for the first HK$ 2 million profits generated by companies having business in Hong Kong.
In summary, companies having business in Hong Kong are now subject to the following profits tax rates under the two-tier tax system:
- incorporated businesses such as limited liability companies are subject to 8.25% profits tax on their first HK$2 million of profit. All subsequent profits are subject to profits tax at the rate of 16.5%
- unincorporated businesses (such as sole proprietorship) are taxed at 7.25% for profits up to HK$2 million. Additional profits are subject to tax at a rate of 15%
Some limitations were introduced to avoid abuses under the two-tier profits tax system.
In presence of a group of companies, only 1 is eligible for the two-tier profits tax regime.
This means that that 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 HK$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).
How to reduce your profit tax rate?
The Hong Kong profit tax system allows you to deduct various expenses from your company’s total turnover.
This helps reducing its net assessable profit (meaning the profit that will be subject to tax) and ultimately the tax your company pays.
Most expenses engaged 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.
When to 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 purpose of this Profit Tax Return Form is to report to the Hong Kong government the amount of profit generated by your company and the subsequent profits tax payable for the relevant year of assessment.
Your company should normally receive its Profit Tax Return Form (BIR51) from the HK Inland Revenue Department during the first few days of April each year.
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 1 April and 30 November).
In other words:
- If your company financial year-end is between 1 April and 30 November, the deadline to submit your Profit Tax Form to IRD is 2 May, with no extension possible
- If your company’s financial year-end is between 1 December and 31 December, the deadline to submit your Profit Tax Form to IRD is also 2 May, with a possible extension until 15 August
- If your company’s financial year-end is between 1 January and 31 March, the deadline to submit your Profit Tax Form to IRD is again 2 May, with a possible extension until 15 November
Please refer to the table below for an easy recap:
Please note that if your company was registered recently, you will receive its first Profit Tax Return (BIR51) from Hong Kong’s Inland Revenue Department 18 months after its date of incorporation.
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 (BIR 51) 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 HK$ 2,000,000, then you are not required to file its audited accounts with the Inland Revenue Department.
Many companies therefore wrongly believe that audited accounts are not necessary, which is a mistake.
The preparation of audited accounts is mandatory even if your company’s gross income is below HK$ 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) 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:
- the place of incorporation of the foreign company
When should profits tax and provisional profits tax be paid?
Profits tax shall be paid as notified by Inland Revenue Department, generally between November of the year in which your company’s Profits Tax Return is received and 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.
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 and even criminal prosecution.
It may also lead to additional higher taxes as your company will then be unable to enjoy the carious deductions and incentives normally available.