Starting a business venture in Hong Kong is one of the most attractive options for investors worldwide due to its impressive corporate tax system, the absence of capital gains tax, and a territorial system for Hong Kong salaries tax.
The corporate tax regime only taxes profits from a trade, business, or profession in Hong Kong.
In Hong Kong, instead of having one single income tax, they have three different ones:
- Salaries Tax: This tax is based on your net chargeable income, which is your assessable income minus personal deductions and allowances. The tax rates range from 2% to 17%, or a flat rate of 15% on assessable income minus personal deductions, whichever is lower.
- Profits Tax: For unincorporated businesses, there's a two-tiered system. The tax rate for the first HKD2 million of profits is reduced from 15% to 7.5%, while the remaining profits are taxed at the normal rate of 15%.
- Property Tax: This tax is a flat rate of 15% on rental income after a standard deduction of 20%.
Each of these taxes is calculated separately. If it's more beneficial, a permanent or temporary resident of Hong Kong can choose to be assessed under personal assessment, which aggregates their income or losses from all sources.
The filing for such taxes is commonly known as Profits Tax Returns.
Who Should File Profits Tax Returns With the Inland Revenue Department?
Every Hong Kong company—whether a small business, partnership, or self-employed individual—is required to file Profits Tax Returns. The Inland Revenue Department (IRD) provides the necessary forms for this process.
To help reduce your tax burden, Hong Kong offers allowances. The basic allowance is HKD 132,000, while the married person’s allowance is HKD 264,000 if your spouse has no taxable income or if you choose joint assessment.
For the 2021-22 tax year, the government introduced a one-time tax rebate, covering 100% of the final tax payable for salaries tax and tax under personal assessment. This rebate is capped at HKD 10,000 per taxpayer.
This system ensures businesses and individuals only pay taxes on their actual taxable income while benefiting from available deductions and rebates.
3 Forms for Filing Profit Tax Returns
The Inland Revenue Department issues three forms for filing profit tax returns. These are:
- BIR-51 – Corporations
- BIR-52 – Persons other than corporations (such as partnerships)
- BIR-54 – In respect of Non-Resident Persons (non-resident persons who receive an income from practicing any trade, profession, or business in Hong Kong)
In case you are carrying out a business as a sole proprietor, you can file the Profits Tax Returns through Tax Return – Individuals (BIR60).
For filing these forms, one needs to log on to eTax, the gateway set up by the Inland Revenue Department.
When Do You Start Filing Profits Tax Returns?
IIf you’ve just registered a Hong Kong company, you must file your first Profits Tax Return (PTR) 18 months after incorporation.
For example, if your company was incorporated on January 1, 2020, expect to receive a tax return filing request around June 2021.
After that, you’ll need to file your PTR every year.
What You Need to Submit
- For all companies: If your business has started operations (in Hong Kong or elsewhere), you must prepare financial accounts and report them in your PTR.
- For standard corporations: Submit Form BIR51 along with audited financial statements prepared by a certified public accountant.
- For small corporations (with total gross income under HKD 500,000 in a tax year): You only need to submit Form BIR51 and required supplementary forms—audited financial statements are not required. However, your filings should still be based on audited financial statements, so keeping copies is recommended in case the Inland Revenue Department (IRD) requests them.
Filing Deadlines
- The IRD typically issues tax return requests on the first working day of April each year.
- Companies must file their returns within one month of receiving the request.
- While Hong Kong’s fiscal year runs from April to March, your company’s accounting year may be different.
How Is the Profit Tax Return Calculated in Hong Kong?
When a company in Hong Kong files its Profit Tax Return, it must include all types of income, not just money made from its main business. This means the company has to count different kinds of earnings, such as:
- Interest income
- Rental income
- Royalties from intellectual property
- Profits from operating within Hong Kong
- Government grants, subsidies, or other financial aids
- Proceeds from bills of exchange or certificates of deposit
- Refunds on retirement scheme contributions
Understanding the Two-Tiered Profits Tax System
Hong Kong’s tax system is designed to support small and medium-sized enterprises (SMEs) through its Two-Tiered Profits Tax Regime. Key points include:
| Category | Assessable Profits | Tax Rate for Corporations | Tax Rate for Unincorporated Businesses |
|---|---|---|---|
| Reduced Rate | First HK$2 million | 8.25% | 7.5% |
| Standard Rate | Beyond HK$2 million | 16.5% | 15% |
Steps to Determine Taxable Income
To calculate a company’s taxable income in Hong Kong, follow these key steps:
- Exclude Non-Taxable Income – Remove any earnings that are not subject to tax.
- Deduct Business Expenses – Subtract costs directly related to running the business.
- Deduct Losses – If the company had losses this year, subtract them or carry them forward to offset future taxes.
- Account for Balancing Charges – If capital assets (e.g., buildings, machinery) are sold for more than their tax-adjusted value, include the excess as taxable income.
- Apply Capital Allowances – Instead of spreading deductions over time, businesses get upfront tax breaks for asset purchases and annual depreciation.
This process ensures businesses only pay taxes on their actual profits after necessary adjustments.
What if You're Unable to Meet the Deadline?
A one-month window might not be enough time to complete your profits tax return. Fortunately, you can request an extension.
At the start of the year, the IRD sends out a Circular Letter detailing the Block Extension Scheme. This letter includes information on how to apply for an extension and notify any changes in your details.
What Are the Penalties for Non-Compliance?
If you don’t follow the rules or don’t keep proper records, penalties are imposed. The maximum fine can reach HK$100,000, and you could be charged three times the unpaid tax. In extreme cases, it might even lead to up to three years of imprisonment.
Because of these serious penalties, it's very important to keep your business records correct. If you need help, our expert team can make sure your profits tax return is done accurately and avoid any mistakes.
What Are Supplementary Forms for Profits Tax Returns?
If you qualify for preferential tax treatment or wish to claim tax incentives, you must submit the relevant supplementary form along with your Profits Tax Return.
| Year of Assessment | Form Code | Description |
|---|---|---|
| 2018/19 onwards | S1 | Person electing for two-tiered profits tax rates |
| S2 | Transfer pricing | |
| S3 | Expenditure on research & development | |
| S4 | Expenditure on energy-efficient building installation | |
| S5 | Ship-owner | |
| S6 | Professional reinsurer | |
| S7 | Authorized captive insurer | |
| S8 | Qualifying corporate treasury centre | |
| S9 | Qualifying aircraft lessor | |
| S10 | Qualifying aircraft leasing manager | |
| 2020/21 onwards | S11 | Qualifying ship lessor |
| S12 | Qualifying ship leasing manager | |
| S13 | Specified insurer | |
| S14 | Licensed insurance broker company | |
| S15 | Persons deriving eligible carried interest | |
| 2022/23 onwards | S16 | Qualifying ship agent |
| S17 | Qualifying ship manager | |
| S18 | Qualifying ship broker | |
| S20 | Tax concessions for family-owned investment holding vehicle (Formerly named as IR1479) | |
| IR1478 | Taxation on specified foreign-sourced income | |
| 2023/24 onwards | IR1481 | Onshore gain on disposal of equity interests – Tax certainty enhancement scheme |
| IR1482 | Tax concessions for intellectual property income |
Can I Claim Exemption from Profits Tax Returns?
If your business activities occur outside Hong Kong, you are exempted from the Profits Tax
Return, even when you remit such profits to Hong Kong.
This allows you to enjoy a tax-free profit.
However, you must file for Profits Tax Exemption to enjoy this status.
The filing includes:
- Filing the Profits Tax Return along with audited financial statements.
- Filing for an offshore status. However, you can only file for this 18 months after filing your first Profits Tax Return.
After this, the Inland Revenue Department, based on the documentation provided and the corporate structure, issues an offshore claim inquiry letter for the firm as proof.
The company's key personnel, including directors, may also need to provide relevant documents to the Department.
Finally, the offshore status is issued — however, you must disclose critical changes to the company structure or status every 12 months from the date on which offshore status was granted.
Can I Get an Extension for the Submission of Profits Tax Returns?
Extensions are provided only if you can show sufficient reasons.
Typically, the Inland Revenue Department offers a Block Extension Scheme at the beginning of each year when companies can apply for extensions for filings.
Failure to comply with the deadlines can result in imprisonment of up to 3 years and a fine up to a maximum of HKD 50,000.
Can I Declare the Profits Tax Return as NIL?
If you have not commenced any operations or carried out any business transactions during the assessment year, the Profits Tax Return can be filed as NIL.
This simply indicates that your company has not conducted any business outside or within Hong Kong.
Final Words
Getting everything organized to file the profits tax return can be overwhelming. That's why it makes perfect sense to outsource such activities, so you can have more time to look after your business.
At Air Corporate, we can do just that! We take care of incorporation, secretarial, and accounting tasks and simplify your life. Our team of experts can help you keep your business on track without you having to break a sweat.
Register your business in Hong Kong with Air Corporate today, or switch your company secretary to us, and we'll handle all your profits tax needs!
