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.
Plus, Hong Kong does not levy tax on capital gains if you sell your company or business.
There are also no withholding taxes levied on dividends and interest.
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 Hong Kong 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, 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
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:
- Incorporated businesses such as limited liability companies are subject to 8.25% concessionary tax rate on their first HKD 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 HKD 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 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).
The tax rates for businesses in Hong Kong are:
- For profits up to HKD 2 million:
- Corporations with business in Hong Kong: 8.25%
- Unincorporated businesses with business in Hong Kong: 7.5%
- Corporations with no business in Hong Kong: 0%
- For profits above HKD 2 million:
- Corporations with business in Hong Kong: 16.5%
- Unincorporated businesses with business in Hong Kong: 15%
- Corporations with no business in Hong Kong: 0%
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 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 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 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).
The Profit Tax Form (BIR51) is issued on April 1st every year. Here's a breakdown of filing deadlines and tax payment based on your financial year end:
- Financial Year Ends April to November:
- Basic Deadline to Submit BIR51: May 2nd
- Deadline to Pay Tax: As notified by the IRD (typically between November and April of the following year)
- Financial Year Ends December:
- Deadline to File for Extension: May 15th
- Deadline to Pay Tax: As notified by the IRD (typically between November and April of the following year)
- Financial Year Ends March:
- Deadline to File for Extension: November 15th
- Deadline to Pay Tax: As notified by the IRD (typically between November and April of the following year)
Regardless of your financial year end, extensions are not automatically granted.
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.
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 (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.
Tax Advantages for Qualifying Debt Instruments
Hong Kong provides a favorable tax regime for Qualifying Debt Instruments (QDI). These are debt instruments issued in Hong Kong that meet specific criteria. Holders of QDI benefit from:
- Interest income exemption: Interest earned on a QDI is generally exempt from profits tax.
- Trading profits exemption: Profits from buying and selling QDI in the secondary market may also be exempt from profits tax.
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.
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 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.
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 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. 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.
Deductions and Tax Incentives at Risk
It may also lead to additional higher taxes as your company will then be unable to enjoy the various deductions and incentives normally available.
- Corporations with a business in Hong Kong pay 8.25% tax on the first HKD 2 million of assessable profits, and 16.5% on any profits above that.
- Unincorporated businesses in Hong Kong pay a flat 7.5% tax on the first HKD 2 million of assessable profits, and 15% on any profits above that.
- Corporations with no business in Hong Kong pay no profits tax in Hong Kong regardless of their assessable profits.
Ready to Get Started?
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.
