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If you’re a business owner, then you know that managing your accounts receivable is essential to success.

But what is account receivables management? And more importantly, what can it do for your business?

We’ll discuss ar management in detail and explain how it can help you streamline your operations and increase profits.

What Is Accounts Receivable?

Before you can learn about ar management, it’s important to know what account receivables are.

Simply put, accounts receivable (AR) is the money that customers owe your business for products or services provided on credit.

This could include things like a purchase order from a customer who has yet to pay their invoice or an open payment term from another company that hasn’t sent in their bill yet.

Businesses use AR financing options so they don’t have to wait until all of their invoices get paid before they can receive funds back into their bank account and continue operating smoothly without interruption due to these fund shortages which would otherwise be caused by unpaid bills coming up short in cash flow.

If there was no such thing as ar management then companies would not have this option available to them!

And while many businesses choose not to use these financing options because they think it’s too risky, there are also those who feel like taking on a little more risk is worth paying off their bills sooner rather than later.

Why are Accounts Receivable Important?

Accounts Receivable are important to a company because they represent cash that is owed by customers.

This money can be used to pay expenses, fund day-to-day operations, and grow the business.

The Accounts Receivable account on your balance sheet shows you how much money is due from your clients at any given time in the form of invoices that haven’t yet been paid or settled with account credit.

You should keep track of these receivables so that you know which clients have outstanding payments and what their payment terms (i.e., how long until it’s due) are.

If you don’t have a good system for managing your Accounts Receivable, you may miss out on potential revenue and could wind up with bad debt.

You also need to be able to track payments so that you know when someone has paid an invoice and can mark it as “paid” in your accounting software.

This will help keep your books accurate.

There are a few key things to remember when it comes to accounts receivables management:

• Stay organized! Keep track of invoices, payments, and account credits in a spreadsheet or other tracking tool.
• Follow up with clients who haven’t paid their invoices yet! Don’t let money just sit there. Send them reminder emails or call them to see what’s going on.
• Use good accounting software that can help you track payments and keep your books accurate. This will save you time and headaches down the road.

Managing your Accounts Receivable is important for any business, big or small.

By following these tips, you can make sure that this aspect of your finances is taken care of and doesn’t become a headache.

The Accounts Receivable Process

The accounts receivable process is the system that a company uses to track and manage payments owed to it by its customers.

This process usually begins when a customer places an order with a company and ends when that customer has paid for all of the products or services they ordered.

The accounts receivable process involves several steps, including:

1. Tracking orders and invoices
2. Determining which invoices are due for payment
3. Issuing bills and reminders to customers
4. Collecting payments from customers
5. Recording payments in the accounting system

companies use a variety of methods to track and manage their accounts receivable, including specialized software, spreadsheets, and handwritten ledgers.

However, the most important part of the process is ensuring that all payments are tracked and recorded in the accounting system.

This allows companies to keep accurate records of their income and expenses, and make informed decisions about their financial future.

The accounts receivable process can be complex and time-consuming, but it’s essential for any business that wants to maintain healthy finances.

By understanding the basics of this process, business owners can ensure that they’re taking steps to protect their bottom line.

Common Challenges in ARM

Accounts receivable management is the process of managing customer payments.

This has become a necessary task for businesses that want to ensure that they get paid by their clients on time, if not early.

The problem with this system is it can be tedious and challenging in many ways:

Dependence on paper-based systems

Some companies still use paper-based processes in managing accounts receivables.

If a company does use an online or cloud accounting system, its employees might have to manually update the records every now and then which can make things more prone to human error.

Then there are those who rely on manual payment processing through checks or cash which takes longer than electronic payments such as credit cards and wire transfers via banks (ACH).

Tracking down unpaid customers

Trying to track down customers who have outstanding invoices can be a daunting task.

This is especially true if the company is using an outdated or manual system in which information about these debts may not be readily available.

In some cases, it might require calling customers or sending them letters in order to remind them of their obligations.

Sending out collection notices

Another challenge lies in determining when it’s time to send out a collection notice.

If a business sends out too many notices, it could alienate its customers and lose future business opportunities.

However, if they wait too long, the debt could become harder to collect and the customer’s credit score could take a hit.

Handling customer disputes

Disputes with customers can also create a challenge for businesses.

This may include disagreements about the invoice amount, the quality of the product or service provided, or late delivery.

In some cases, it might require going to court in order to resolve the dispute.

Dealing with chargebacks

A chargeback happens when a customer disputes a credit card payment that was made to your business.

The bank then reverses the transaction and charges back the funds to your account.

This can be costly for your business as you will need to pay administrative fees as well as any legal expenses incurred in fighting the chargeback.

There are many challenges that companies face when trying to manage their accounts receivable effectively.

By understanding these challenges, businesses can develop strategies to overcome them and improve their accounts receivable management process.

Automating the AR Process

When it comes to automating the accounts receivables process, there are a few different options that businesses can choose from.

One option is to outsource the entire process to a third-party company.

This can be helpful for businesses that don’t have the staff or resources to handle AR themselves.

Outsourcing also allows companies to focus on their core competencies and leave the AR management to specialists.

Another option is to use software that helps automate some of the tasks related to AR.

This can include invoicing, tracking payments, and generating reports.

Automated software can save time and energy, making it easier for businesses to keep track of their receivables.

A final option is to combine outsourcing with automated software.

This can be a great option for businesses that want the benefits of both options.

By outsourcing to a specialist and using software to automate tasks, businesses can get the best of both worlds.

No matter which option businesses choose, it’s important to make sure that the AR process is as efficient and effective as possible.

Automating the process can help ensure this happens.

Here’s some ideas:

• Use specialized software to automate the invoicing and tracking of payments.
• Automated systems can flag potential problems with customers’ credit ratings, helping you avoid late or missed payments.
• Have your bank set up automatic withdrawals for regularly scheduled bills, such as rent or loan payments. This will help ensure that payments are never missed or late.
• When possible, have customers pay online using a secure payment gateway. This helps to speed up the processing of payments and reduces the chances of human error.
• Invest in automated reconciliation tools that compare customer account data against your own records on a regular basis. This will help you quickly identify any discrepancies and take corrective action before they become bigger problems.
• Automate the process of reconciling accounts. This will save you time and help to reduce errors between your books and those of your customers.

What next?

The process of accounts receivable management can be complex and challenging for businesses.

However, by using automated tools and outsourcing to specialists, businesses can make the process easier and more efficient.

By automating the process and focusing on their core competencies, businesses can improve their bottom line and ensure that they are getting paid for the products or services they provide.

Is your business looking for a way to make AGM less of a hassle?

Choose Air Corporate as your dedicated accounting service provider and get world-class accounting, or more, for your company.

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How To Minimize Tax & VAT For Your E-Commerce

Every business has the responsibility to file and pay its taxes.

Doing so provides an opportunity to fulfill your legal duties and consider the best practices to save money by reducing your taxes.

You need to carefully understand how much you need to pay to avoid overpaying on your taxes, as it can take a while to get refunded.

What is Tax & VAT?

Taxes are the compulsory financial charge imposed on a taxpayer by a governmental organization to fund government spending and other public expenditure.

Value-added tax (VAT) is commonly referred to as a goods and services tax.

This type of tax is placed on the price of a good or service at each stage of its production, distribution, and final sale.

Here, consumers pay a tax on any goods and services they purchase based on the product’s value.

How does your eCommerce get taxed?

The amount of tax you have to pay is derived from the profit your business generates.

Your profit is your total revenue minus total expenses.

The higher the profit, the higher the amount of tax you have to pay.

Therefore, the more you spend on your business, the more you save on taxes, as most business expenses are tax-deductible.

However, it would be best to keep in mind that not all business expenses are treated the same as some are measured differently.

What is the difference between costs and expenditure? 

To understand how to minimize the amount of tax you have to pay, you will first need to understand the differences between your business costs and expenses.

All your business costs refer to the cost of production and operation, whereas all business expenses refer to fixed monthly expenses such as rent and utilities.

Regardless of how much you produce, your fixed monthly expenses will remain the same, unlike your operational costs.

This difference is relevant to how your business gets taxed.

All production and operating costs are deductible on your business tax return, lowering your overall income tax bill.

Another important factor to consider is the depreciation expense for each year, which is tax-deductible and known as a ‘non-cash expense’ as there is no check or receipt.

Despite there being no check, businesses can use it to reduce their income for tax purposes.

For example, suppose you buy a laptop for your business.

In that case, you can deduct the depreciation in its value each year, which is usually measured to be around 10-20% each year.

What is a deductible expense?

For tax purposes, a deductible is an expense that a business or a taxpayer can deduct from their gross income when filing their tax return.

Deductible expenses reduce the income earned and therefore reduce the amount of tax that is owed.

Examples of deductible expenses include advertising, transportation, travel, insurance, administration and management fees, delivery, maintenance, and repair work.

Depending on the expense, you can either deduct a percentage or the full amount of the cost from your tax bill.

On the other hand, non-deductible expenses have no impact on your tax bill. 

These expenses do not add to the normal operations of your business and cannot be used to reduce your tax payable amount.

Non-deductible expenses are often referred to as ‘natural’ or ‘persona’ expenses, which do not contribute to the business’s operations.

Such expenses include food, clothing, rent, and gasoline.

It is often quite easy to identify which expenses are tax-deductible and which expenses are not.

How do deductible expenses save businesses money on tax?

It is crucial to understand the available tax deductions for your eCommerce business to minimize your overall tax payable amount.

If your business bears any of the following costs, you can claim a deduction when filing a tax return!

Working From Home

Most e-commerce businesses are run purely online and have no physical office.

If you work from home to manage your business, you may be able to claim a deduction for using part of your home as a workplace.

You can claim the specific costs for transitioning part of your home or any other building to an office.

You can also claim a business proportion of the total costs of using your home as a workplace.

Moreover, if your eCommerce is registered as a limited company, you could even charge it rent.

Lastly, you could also charge your business a fixed rate deduction either weekly, monthly, or annually. 

Office Sharing

Suppose you do have a physical office space and are sharing it with another business.

In that case, the cost associated with operating the space may be deducted as part of office costs.

This is quite similar to claiming the costs associated with a traditional physical office space which include utilities, office supplies, rent, and equipment.

Mobile & Internet

Another cost you claim is any phone bills associated with the running of your eCommerce business.

These costs include using a mobile phone to provide customer care service or liaise with suppliers or other business stakeholders.

You can claim the cost of making such phone bills when you file your tax return.

Moreover, suppose your eCommerce is registered as a limited company.

In that case, the company can also pay for the cost of a mobile phone or company landline. 

Additionally, as all eCommerce and Dropshipping businesses are run online, you will need a strong internet connection.

A stable internet connection is crucial to running your business, which means your business internet bill is tax-deductible.

Keep in mind that if you work from home and use the same internet provider for your personal use and your business use, you will need to carefully calculate and deduct the proportion of your internet bill usage associated with running your eCommerce business. 

Website Development

Another crucial part of running your eCommerce business is your website and your platform to develop it.

Therefore, the costs of setting up your website, registering a domain, paying for any external IT assistance to ensure it runs smoothly are all tax-deductible.

This is limited to websites as any other application used to manage, track, and operate your business is tax-deductible.

These include any apps used to upgrade your website, manage its traction, process sales transactions, or track competitors.

Additionally, you can claim the cost of any hardware or software relating to the website’s functionality as tax-deductible.

Hiring Independent Contractors

All costs associated with hiring independent contractors or freelancers to assist with running your eCommerce business are tax-deductible.

You may hire a contractor to design your website, produce content for your website or market your products.

Regardless of the purpose of hiring a freelancer, as long as it is directly associated with the running of the business, these costs are tax-deductible.

However, make sure that you do not include any of your employees as freelancers or independent contractors, as it is illegal to claim tax deductions on regular employees.

Delivery, Transport & Travel Costs

Most of the costs incurred from delivering goods to the end consumer are tax-deductible.

This not only includes the shipping cost but all costs associated with packaging, envelopes, stamps, postage, and delivery charges.

Moreover, using your own car to deliver packages, attend client/supplier meetings, or carry out any other business activity necessary to operate your business is also tax-deductible.

Firstly, you may be able to claim a mileage allowance for business miles to cover petrol costs and any other costs to run your motor vehicle.

Secondly, you could also claim a business proportion of your vehicle costs if you operate your eCommerce business as a sole trader or a partnership.

Insurance & Bank Fees

Suppose you have paid for any non-health-related insurance for your eCommerce business, such as business or public liability insurance.

In that case, you will qualify for a tax deduction in this regard.

Moreover, all interest paid when you use a credit card to pay for business expenses or obtain a business loan is tax-deductible. 

Professional & Legal Services

For whatever reason, if you have paid for any accountancy, tax, or legal fees to help manage your business finances and ensure your business is compliant with all legal requirements, such costs are also tax-deductible.

Final Words

If you want to minimize the tax imposed on your eCommerce business, you should carefully consider these costs and how you can increase them to save more on your taxes and increase your profitability.

Moreover, you should never mix your business and personal expenses as this can severely impact your business and get you into deep trouble. 

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Hong Kong is globally recognized as an international business hub.

Thousands of trading companies, professional services firms, and multinationals are registered annually in Hong Kong.

The city has the right facilities and resources for individuals and corporations seeking an overseas destination for their businesses. 

While there are numerous reasons why companies register in Hong Kong, the city has attracted many foreign investors seeking to hold their assets offshore because of its low tax rate and tax exemptions. 

If you’re wondering how to take advantage of the tax exemptions in Hong Kong, keep reading to find out. 

Is Hong Kong tax-free?

Hong Kong is widely recognized as a tax haven by investors.

The city does not impose capital gains tax on the value of disposed assets or charge value-added tax or consumption tax on goods.

Import duties are also low and levied on a few goods. 

However, Hong Kong is not tax-free as individuals and companies are required to pay income tax on their taxable income.

The good news is the corporate income tax rate in Hong Kong is between 8-16.5 percent which is lower than the tax rates in most jurisdictions. 

But unlike many jurisdictions, taxable income in Hong Kong is restricted to profit derived from trading activities or businesses conducted in Hong Kong.

This has presented growing and large organizations with a juicy benefit – offshore tax exemption. 

Offshore tax exemption in Hong Kong and how to take advantage of it

An offshore company is a company set up in a country other than where its shareholders are domiciled or where its parent company is registered.

Offshore companies may conduct business in that country or not.

Many offshore companies are asset-holding companies that do not derive any profit or engage in any business in those offshore countries. 

In Hong Kong, offshore companies that do not conduct business in Hong Kong or derive profit from Hong Kong are eligible for tax exemptions.

Many foreign companies benefit and maximize profit from the offshore status conferred on foreign companies in the city.

If you’re thinking of registering an offshore company in Hong Kong or wondering how your offshore company can take advantage of the offshore exemption status in Hong Kong.

Here are two simple steps to follow:

Step 1: Register your offshore company

Registering your company is the first step you must take to become eligible for offshore tax exemptions.

Luckily, you can register your company digitally with us in less than 48 hours and you do not have to visit Hong Kong to do so. 

You can register your company with a new name or use your company’s name as long as the name is available.

Your company’s directors and shareholders can be foreign individuals or foreign entities.

But, you’ll need to appoint a qualified and licensed company secretary which must be either a Hong Kong resident or a firm with a TCSP license.

Alternatively, you can appoint a digital company secretary and let them take care of it for you.

Step 2: Apply for offshore status with the Internal Revenue Department (IRD)

An offshore company seeking to claim tax exemption must apply for offshore status with the Hong Kong Internal Revenue Department (IRD).

The IRD issues tax exemption letters to eligible companies. 

These tax exemption letters are popularly referred to as offshore claims.

Only companies with offshore claims can claim tax exemptions in Hong Kong.

The good thing is, the process of obtaining an offshore claim is quite straightforward. 

When to apply for offshore status in Hong Kong

There is no deadline for applying for offshore status in Hong Kong and a company that has been registered for years can still apply.

It is however advisable to submit your application within the first 18 months of the company’s incorporation. 

Newly incorporated companies in Hong Kong are required to file profit tax returns within 18 months of being registered. You’ll need to submit your profit tax returns with your application.

Therefore,  if you want to claim tax exemptions on profit achieved within your company’s first years of incorporation, you’ll have to report it.

How to apply for offshore status in Hong Kong

To apply for offshore status in Hong Kong, you’ll need to file your profit tax returns and supporting documents.

The supporting documents usually include expense receipts, invoices, award letters, and other documents that prove that your company’s income was not derived from Hong Kong.

You’ll also need to submit your incorporation documents along with your application. 

Once you’ve submitted your application, the IRD will consider your application. This typically takes less than 6 months.

To improve your chances of getting your application approved, it is advisable to consult a certified public accountant (CPA) in Hong Kong. 

You can reach out to us for your offshore status application.

Our team of accountants can advise you on your options and make your application process stress-free. 

Are all offshore companies eligible for tax exemptions in Hong Kong?

Not all offshore companies are granted offshore claims by the IRD as the IRD can approve or reject applications for offshore status.

This is because not all offshore companies are eligible for tax exemptions in Hong Kong. 

Only offshore companies capable of proving that their income was derived exclusively from locations outside Hong Kong are eligible for offshore tax exemptions in Hong Kong.

The IRD requires offshore companies seeking offshore tax exemptions to prove that they do not conduct business in the region or derive any income from the region.

Companies are required to answer questions and provide supporting documents to prove this. 

Can onshore companies claim tax exemptions in Hong Kong?

Any company set up in Hong Kong can claim tax exemptions in Hong Kong on any part of its income that was not derived from Hong Kong.

Therefore, an onshore company can claim tax exemption if part of its income was derived outside Hong Kong. 

However, it is important to note that this is a partial exemption as the onshore company will still be required to remit income tax profit derived from Hong Kong.

Many companies have benefitted from Hong Kong’s low-income tax rate and tax exemptions.

Setting up affiliate and subsidiary companies in Hong Kong to hold your company’s asset can help your maximize profit. 

If you’re ready to take advantage of tax exemptions in Hong Kong, we’re ready to help you achieve your investment goals in Hong Kong. 

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Hong Kong Accounting Standards are a set of rules that regulate all financial transactions in Hong Kong and outline important accounting terms and conditions.

All companies incorporated in Hong Kong are to abide by these provisions and maintain proper accounts and meet statutory audit requirements.

These accounting standards are governed by the Financial Reporting Standards (FRS) which is based on the International Financial Reporting model (IFRS) established by the International Accounting Standards Board (IASB).

These standards were introduced to highlight the fundamental principles that define Hong Kong accounting terms and clarify their scope to ensure fairness and honesty in a company’s financial statements.

What are Hong Kong accounting standards?

There are 41 accounting standards and 15 financial reporting standards set out by the HKFRS along with other statutory interpretations.

Each standard represents a particular topic such as financial statements, cash flow statements, inventory, and taxes, to name a few. 

An overview of three important Hong Kong Accounting Standards (HKAS) is provided below.

How is accountancy regulated in Hong Kong?

The Hong Kong Institute of Certified Public Accountants (HKICPA) is the professional body responsible for regulating accountancy in Hong Kong and issued the updated HKFRS in January 2005.

The HKFRS outlines 41 accounting standards and 15 financial reporting standards that govern the accountancy profession in Hong Kong.

All companies are required to provide financial statements.

A financial statement is a record or a collection of reports that show the financial performance and business activities of a company or business entity.

Financial statements based on accrual accounting summarize all past transactions, and any future cash payment obligations and highlight where cash might accrue in the future.

These statements include the provision of a balance sheet or a statement of financial position, a statement of comprehensive income/a profit and loss account, a statement of change in equity or financial capital, and the auditor’s report along with additional explanatory notes and accounting policies.

Types of  Accounting Standards in Hong Kong

Hong Kong Accounting Standard 1 (HKAS 1) – Presentation of financial statements

HKAS 1 outlines the requirements regarding preparing and presenting financial statements by a business entity in terms of its structure and content.

• The management is required to assess the entity’s ability to continue as a going concern unless they intend to stop trading and liquidate the entity.
• Financial statements excluding cash flow information are required using the accrual basis of accounting.
• Unless permitted by the HKFRS an entity cannot offset its assets and liabilities or income and expenses.
• A complete set of financial statements is required at least once a year.

Hong Kong Accounting Standard 2 (HKAS 2) – Inventories

HKAS 2 outlines the provisions regarding the accounting standards for inventories in terms of the amount of cost that is to be recognized as an asset and how they are to be carried forward.

• Inventories are to be calculated and measured at the lower cost of and net realizable value.
• The cost of inventories must include the cost of purchases, the cost of conversions, and any other costs incurred that contribute to the inventory’s present location and condition

Hong Kong Accounting Standard 18 (HKAS 18) – Revenue

HKAS 18 outlines the accounting standards of revenue earned from particular types of business transactions and requirements regarding when revenue is to be recognized.

• Revenue must be measured at the fair value of the consideration (received or receivable).
• Revenue generated from the sale of goods can only be recognized when the following requirements are met;
• The significant risks and rewards of ownership of goods have been transferred from the entity to the buyer.
• The entity has no continuing managerial involvement in terms of ownership and control over the goods sold.
• The amount of revenue is calculated reliably.

Learn more about HKICPA’s financial reporting standards

What is the scope of the HKFRS?

The HKFRS only applies to the general purpose financial statements and various means of financial reporting of all profit-oriented business entities.

All profit-oriented entities have been defined as those which participate in commercial and financial transactions.

This includes mutual entities such as insurance companies that distribute monetary benefits to their recipients.

Therefore, the HFRS does not apply to any non-profit activities in both the private and public sectors or those carried out by the government.

Lastly, the general purpose financial statements apply to the information of different stakeholders such as creditors, employees, and shareholders as well as the public.

What about SMEs?

In some circumstances, companies limited by guarantee and private companies are eligible for optional reporting exemption under the new Companies Ordinance as of March 2012.

The Small and Medium-sized Entity Financial Reporting Framework (SME-FRF) and the FRS came into effect in 2014.

According to the new SME-FRF, any entity that is not a company incorporated under the new Companies Ordinance as of March 2012 is subject to specific conditions under the jurisdiction of the place of its incorporation.

Companies are also excluded from the reporting exemption if they do not meet certain requirements.

Private companies are not eligible for reporting exemption if:

• The company is authorized by the Banking Ordinance for banking business.
• The company is licensed to perform regulated business activity under the Securities and Future Ordinance Part V
• The company carries out insurance business (excluding business carried out through an agent)
• The company accepts loans at interest or repayable at a premium through the business (excluding terms that involve debentures and securities).

Find out more on the complete guide to accounting standards for SME-FRS in Hong Kong.

Final words

Here is what you should always have in mind:

• Accounting standards are a set of rules that regulate financial transactions and define important accounting terms and conditions.
• The Hong Kong Institute of Certified Public Accountants (HKICPA) is the professional body responsible for regulating accountancy in Hong Kong.
• There are 41 accounting standards and 15 reporting standards that govern accountancy in Hong Kong.
• The HKFRS only applies to general-purpose financial statements and financial reporting of all profit-oriented entities
• Private companies are eligible for optional reporting exemption if they meet certain requirements.

Are you looking for help with your accounting?

Register your business with Air Corporate and we’ll get you set up with the best accounting services with all your documents available online at any time.

Focus on your business. We take care of the rest.

FAQs

What are Hong Kong accounting standards?

Hong Kong accounting standards are a set of guidelines and regulations that govern how businesses operate in Hong Kong. These standards are designed to ensure that financial information is consistent, accurate, and transparent for individuals including investors, lenders, and regulators.

How do Hong Kong accounting standards differ from international accounting standards?

Hong Kong accounting standards consist of some key differences, such as requiring companies to disclose more information about related party transactions than international standards.

Moreover, Hong Kong accounting standards offer certain areas such as the treatment of research and development costs with more flexibility.

What is the penalty for non-compliance with Hong Kong accounting standards?

Non-compliance with Hong Kong accounting standards can result in penalties such as fines or reputational damage.

In certain cases, this can lead to legal action or criminal charges.

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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
  • confirmation as to whether the country of incorporation requires the preparation of audited accounts including information about overseas subsidiaries and branches and whether such audited accounts were duly prepared
  • a brief recap of Hong Kong’s branch accounting records
  • a certified true copy of such accounting records

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.

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A recent survey from YouGov revealed that more than 70% of entrepreneurs spend over 90 hours per year on accounting only.

90 hours!

This is just wrong.

The only way to grow your business is to focus on finding and serving clients.

You should stay away from admin time-sinks by passing it to professionals you can trust.

There are basically 3 ways to handle the bookkeeping and accounting for your Hong Kong Company.

Wait until the end of the year

You basically wait until the end of the year to deal with your accounting. It is fine if your company has very few transactions. But it is otherwise not a good idea. Why? simply because you will not remember in November what happened with your Hong Kong company in January.

Also, when you wait until the end of the year, the work will be done in a rush with little room for tax planning and optimization.

Solo accounting software

Once you realize that waiting until the end of the year way is not a good option, you will be tempted to take an accounting software to keep track of your accounting and bookkeeping all year long.

That is a good idea, but these software programs can be complicated to use. As a result, you may end up spending a lot of time working just inputting your invoices and other records into the accounting software that you chose. Sometimes, your accountant will even tell you at the end of the year that you made mistakes using the software and that part of the work needs to be done again.

Monthly bookkeeping and accounting packages

The idea is simple: we give you access to your own dedicated professional accountant, available for you each day, but without the trouble or cost of having an accountant in-house on your payroll.

When you use our service, your accountant will do many things to make your life easier: such as sending your invoices, matching transactions with your bank statements, prepare your monthly expense reports, prepare payroll and MPF filings if you have employees or prepare your financial statements.

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Communication with your accountant is easy through whatsapp or email. And when any information or document regarding your accounting is missing, your accountant will simply chase you.

Tax planning and optimization

Finally, because accounting does not make much sense without looking at tax matters, our monthly accounting package includes two conference calls each year to help with your Hong Kong company’s tax planning and optimization.

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Comments closed