Hong Kong has one of the most straightforward corporate tax systems in the world. There is no capital gains tax. No dividend withholding tax. No VAT or GST. And if your profits are generated outside Hong Kong, there is a strong case they are not taxable here at all.
This guide covers every tax obligation a Hong Kong private limited company must manage: profits tax rates, the offshore exemption, deductible expenses, provisional tax, annual filing obligations, and the taxes that simply do not exist here. If you are still deciding whether to incorporate, read our guide to registering a company in Hong Kong first, or use our Is Hong Kong right for me? tool to assess your situation.
Highlights of this article
- Hong Kong uses a territorial tax system. Only profits arising in or derived from Hong Kong are subject to profits tax. Offshore profits are exempt if properly structured and documented.
- The profits tax rate is 8.25% on the first HKD 2 million of assessable profits, and 16.5% on everything above. The two-tiered rate applies to 1 company per group.
- There is no capital gains tax, no dividend withholding tax, and no VAT or GST in Hong Kong.
- Every limited company must have its accounts audited by a Hong Kong CPA before filing the Profits Tax Return (BIR51) with the IRD.
- The first Profits Tax Return is typically issued 18 months after incorporation. From the second year onwards, returns are issued each April.
- Air Corporate handles audit and tax filing for Hong Kong companies from USD 580/year.
How Hong Kong profits tax works
Hong Kong taxes companies on a territorial basis. Only profits that arise in or are derived from Hong Kong are subject to profits tax. Profits earned entirely outside Hong Kong, through transactions negotiated, concluded, and performed outside the territory, are generally not taxable here.
This is fundamentally different from worldwide taxation systems (used in the US, for example), where a company is taxed on global income regardless of where it is earned.
The tax is administered by the Inland Revenue Department (IRD). Companies file annually using Form BIR51 (the Profits Tax Return). The IRD assesses the return and issues a tax demand accordingly.
The 3 conditions that trigger profits tax liability in Hong Kong are:
- The company carries on a trade, profession, or business in Hong Kong
- That trade, profession, or business generates profits
- Those profits arise in or are derived from Hong Kong
All 3 must be met. A company incorporated in Hong Kong that conducts all its business outside Hong Kong can legitimately claim the offshore exemption, but must be able to demonstrate this.
The two-tiered profits tax rate
| Profits level | Tax rate |
|---|---|
| First HKD 2,000,000 of assessable profits | 8.25% |
| Assessable profits above HKD 2,000,000 | 16.5% |
The two-tiered rate structure has applied since the year of assessment 2018/19. It is available to 1 nominated company per group. You cannot apply the lower 8.25% rate across multiple related companies simultaneously.
For an unincorporated business (sole proprietorship or partnership), the equivalent rates are 7.5% on the first HKD 2 million and 15% above.
Example: A Hong Kong company with HKD 5 million assessable profits pays:
- HKD 2,000,000 × 8.25% = HKD 165,000
- HKD 3,000,000 × 16.5% = HKD 495,000
- Total profits tax: HKD 660,000
How to calculate your Hong Kong profits tax: a full worked example
Understanding the rate is only part of the picture. The actual amount you pay depends on the assessable profits figure, which is your adjusted accounting profit after adding back disallowed expenses and applying depreciation allowances. Here is a step-by-step calculation for a company with HKD 5 million in revenue.
The scenario
A Hong Kong private limited company provides software consulting services to overseas clients. It has been incorporated for 2 years and uses a 31 March financial year end.
Financial year: 1 April 2025 to 31 March 2026
| Item | HKD |
|---|---|
| Total revenue | 5,000,000 |
| Staff salaries | (1,200,000) |
| Office rent (Hong Kong) | (240,000) |
| Professional fees (legal, accounting, audit) | (120,000) |
| Business travel | (80,000) |
| Software subscriptions and tools | (60,000) |
| Laptop and equipment purchases | (150,000) |
| Client entertainment expenses | (40,000) |
| Accounting profit before tax | 3,110,000 |
Step 1: Identify disallowed expenses
Not all accounting expenses are deductible for profits tax purposes. The IRD disallows:
- Client entertainment (50% rule): Only 50% of client entertainment is deductible. Of the HKD 40,000 entertainment spend, only HKD 20,000 is allowable. The HKD 20,000 disallowed portion is added back to accounting profit.
- Capital expenditure on equipment: The HKD 150,000 spent on laptops is capital expenditure. It is not deductible as a current expense but qualifies for depreciation allowances (see Step 2). The full HKD 150,000 is added back.
| Adjustment | HKD |
|---|---|
| Accounting profit | 3,110,000 |
| Add back: disallowed entertainment (50%) | +20,000 |
| Add back: equipment purchases (capital) | +150,000 |
| Adjusted profit | 3,280,000 |
Step 2: Apply depreciation allowances on equipment
Instead of deducting equipment costs as an expense, the IRD grants capital allowances at prescribed rates. Hong Kong uses a pooling system with three depreciation classes:
| Class | Assets | Initial allowance (year 1) | Annual allowance |
|---|---|---|---|
| Class 1 | Computers, peripheral equipment | 60% | 30% on reducing balance |
| Class 2 | Most plant and machinery, vehicles | 60% | 20% on reducing balance |
| Class 3 | Other fixed assets | 30% | 10% on reducing balance |
For this company's HKD 150,000 in laptops (Class 1 assets):
| Allowance | Calculation | HKD |
|---|---|---|
| Initial allowance (year 1) | HKD 150,000 × 60% | (90,000) |
| Annual allowance (year 1) | HKD 60,000 × 30% | (18,000) |
| Total depreciation allowance (year 1) | (108,000) |
The undeducted balance of HKD 42,000 carries forward into the pool and receives annual allowances in future years.
Step 3: Calculate assessable profits
| Item | HKD |
|---|---|
| Adjusted profit | 3,280,000 |
| Less: depreciation allowances on Class 1 assets | (108,000) |
| Assessable profits | 3,172,000 |
Step 4: Apply the two-tiered tax rates
| Profits band | Amount | Rate | Tax |
|---|---|---|---|
| First HKD 2,000,000 | 2,000,000 | 8.25% | 165,000 |
| Above HKD 2,000,000 | 1,172,000 | 16.5% | 193,380 |
| Total profits tax | 358,380 |
Effective tax rate: HKD 358,380 / HKD 5,000,000 = 7.2% of revenue (or 11.3% of assessable profits).
Step 5: Provisional tax for next year
The IRD will also bill provisional profits tax for the 2026/27 year alongside the 2025/26 final assessment. By default, this equals 100% of the 2025/26 final liability: HKD 358,380. If next year's profits are expected to be significantly lower, apply to hold over the provisional tax before the payment deadline.
Total tax demand (both years billed together): HKD 358,380 (final 2025/26) + HKD 358,380 (provisional 2026/27) = HKD 716,760.
This is why the first profits tax payment in year 2 of operation often feels large: it covers two years simultaneously. Budget for this from year one.
The offshore tax exemption: 0% for non-Hong Kong profits
The most important tax advantage for foreign-founded Hong Kong companies is the offshore profits exemption. If your profits arise entirely outside Hong Kong, they are not subject to profits tax.
The exemption is not automatic. You must claim it by filing the Profits Tax Return and providing documentation that supports the offshore nature of your business operations.
What qualifies as offshore profits?
The IRD applies the source of profits test: where did the profit-generating activity actually take place? The key factors are:
- Where contracts are negotiated and concluded
- Where purchase orders and sales orders originate
- Where goods are shipped from and to
- Where services are physically performed
- Where key business decisions are made
If all of these occur outside Hong Kong, the profits are offshore. The company's registered address in Hong Kong, its directors' nationalities, and where its bank account is held are not determinative.
Typical qualifying profile: A Hong Kong company whose founder is based overseas, whose customers are overseas, whose suppliers are overseas, and whose transactions are concluded entirely outside Hong Kong. The company may use Hong Kong as a holding and banking hub while generating zero Hong Kong-source profits.
Documentation required: The IRD may issue a field audit or query requesting evidence of the offshore nature of operations. Maintain contracts, invoices, email correspondence, and shipping records showing where transactions were executed. Your company secretary and accountant manage this process on your behalf.
The FSIE regime for passive income
From January 2023, Hong Kong introduced the Foreign-Sourced Income Exemption (FSIE) regime for multinational enterprise (MNE) groups. Under FSIE, certain categories of passive income (dividends, interest, intellectual property income, and disposal gains from equity interests) are taxable in Hong Kong unless the company meets economic substance requirements.
For most small and medium-sized foreign-founded companies that are not part of an MNE group, FSIE does not apply. If your company is part of a group with entities in multiple jurisdictions, seek specific tax advice on how FSIE interacts with your structure. For tax planning as a foreign founder operating remotely from Hong Kong, see our digital nomads tax guide.
Deductible expenses that reduce your tax bill
Assessable profits are calculated after deducting expenses incurred in the production of profits. The following are deductible under the Inland Revenue Ordinance:
| Deductible | Not deductible |
|---|---|
| Salaries and wages of employees | Capital expenditure (generally) |
| Office rent and utilities | Domestic or private expenses |
| Professional fees (legal, accounting) | Fines and penalties |
| Business travel and accommodation | Income tax paid to other jurisdictions |
| Depreciation allowances on plant and machinery | Provisions not actually incurred |
| R&D expenditure (enhanced deductions available) | Expenses not related to producing profits |
| Charitable donations (up to 35% of assessable profits) | Reserves and contingency funds |
Depreciation: Hong Kong does not use standard depreciation schedules. The IRD grants depreciation allowances (also called capital allowances) on qualifying assets. These are calculated using prescribed rates under the Inland Revenue Ordinance and claimed on the tax return.
R&D deductions: Qualifying R&D expenditure may be deducted at 100% or 300% depending on the type. From April 2023, a 5% concessionary rate applies to qualifying intellectual property income.
For the full breakdown of every deductible and non-deductible expense category including capital allowances and entertainment rules, see our deductible expenses guide. For the step-by-step assessable profits calculation, see our profits tax calculation guide.
Taxes that do not exist in Hong Kong
This is one of the most important sections for founders considering Hong Kong incorporation:
| Tax | Status in Hong Kong |
|---|---|
| Capital gains tax | Does not exist. Gains on sale of assets, investments, and property are not taxed. |
| Dividend withholding tax | Does not exist. Dividends paid by a HK company to shareholders are not taxed. |
| VAT / GST | Does not exist. No sales tax on goods or services. |
| Inheritance tax | Abolished in 2006 |
| Net wealth tax | Does not exist. |
The absence of capital gains tax means founders selling their Hong Kong company or its assets are not taxed on the gain in Hong Kong. The absence of dividend withholding tax means you can distribute profits to shareholders anywhere in the world without a Hong Kong-level deduction. For a full breakdown of how dividends are treated, see our guide to dividend income in Hong Kong.
How provisional profits tax works
Hong Kong companies pay profits tax in advance through a system called provisional profits tax. This is not an additional tax. It is a prepayment toward the following year's tax liability.
When the IRD issues your profits tax assessment, it includes 2 components:
- Final profits tax for the completed year of assessment
- Provisional profits tax for the current year (typically 100% of the preceding year's final liability)
Both are billed together in the same tax demand. The provisional tax is offset against the following year's final assessment once that year's return is filed and assessed.
If your current year profits are expected to be significantly lower than the previous year, you can apply to the IRD to hold over the provisional profits tax (or a portion of it). This application must be made before the provisional tax becomes due. See our provisional tax holdover guide for the 90% rule, application forms, and deadlines.
Annual tax filing obligations
Every Hong Kong private limited company must complete the following steps each year in sequence:
Step 1: Prepare audited financial statements
All limited companies must have their accounts audited by a Certified Public Accountant (CPA) registered in Hong Kong. The audit must cover the full financial year. Audited financial statements include a balance sheet, income statement, cash flow statement, and auditor's report. Accounts must comply with Hong Kong accounting standards (HKFRS or SME-FRS). Audits must follow Hong Kong Standards on Auditing (HKSAs) issued by the HKICPA.
The audit must be completed before the Profits Tax Return can be filed. There is no option to self-certify or waive the audit requirement for private limited companies. It is mandatory regardless of company size, revenue, or dormancy status. Air Corporate provides company audit services from USD 580/year.
For the full list of annual obligations beyond tax, see our annual requirements guide for Hong Kong companies.
Step 2: File the Profits Tax Return (BIR51)
The IRD issues Form BIR51 (Profits Tax Return) each year. The first return is typically issued approximately 18 months after the company's incorporation date. From the second year onwards, the IRD issues returns each April.
The return must be filed within 1 month of the date of issue, unless you are represented by a tax agent who has obtained a bulk extension (which most registered accountants do).
The return must be accompanied by:
- Audited financial statements
- Tax computation
- Any supplementary schedules required by the IRD
Dormant companies with zero revenue must still file a return noting nil assessable profits. There is no exemption from filing based on inactivity. For a complete filing calendar with all key dates, see our Hong Kong tax deadline checklist.
Step 3: Pay profits tax
The IRD issues a tax demand after processing the return. Payment is due by the date specified on the demand. Late payment attracts a 5% surcharge on the outstanding tax, with a further 10% surcharge if payment remains outstanding after 6 months.
For the full profits tax filing process, deadlines, and provisional tax calculation, see our profits tax return guide.
Step 4: Keep records for 7 years
The IRD requires companies to retain all business records, including invoices, contracts, bank statements, and receipts, for a minimum of 7 years. Records must be kept in either English or Chinese. Failure to maintain adequate records is an offence under the Inland Revenue Ordinance and can result in fines. For a full guide to bookkeeping obligations and record-keeping best practices, see our bookkeeping and accounting guide. For understanding the difference between your Annual Return and Profits Tax Return deadlines, see our Annual Return vs Profits Tax Return guide.
Management accounts are separate from statutory accounts and are not filed with the IRD, but they are essential for tax planning and cash flow visibility. See our management accounts guide for when and how to prepare them. Understand the difference between management accounts and statutory accounts and when each is required.
Other taxes to be aware of
Stamp duty
Stamp duty applies to:
- Hong Kong stock transfers: 0.2% of the consideration (0.1% each from buyer and seller)
- Property transactions: Ad valorem stamp duty at rates up to 4.25% for properties above HKD 20 million
Stamp duty on share transfers is payable within 2 days of transfer for Hong Kong shares and within 30 days for shares of non-Hong Kong companies traded in Hong Kong. For a detailed breakdown, see our stamp duty guide. For withholding tax on royalties and entertainer fees paid to non-residents, see our withholding tax guide.
Property tax
A flat 15% property tax applies to the net assessable value of Hong Kong properties let by companies (rental income less a standard 20% deduction for repairs and maintenance). Companies can elect to offset property tax against profits tax liability, which effectively eliminates double taxation for most businesses.
Employer MPF contributions
Every Hong Kong company with employees must contribute to the Mandatory Provident Fund (MPF). The mandatory contribution rate is 5% of each employee's relevant income per month, capped at HKD 1,500 per month per employee (based on the monthly income cap of HKD 30,000). For employees, income is taxed under Hong Kong salaries tax rather than profits tax.
From 1 May 2025, the MPF offsetting mechanism was abolished. Employers can no longer use their MPF contributions to offset severance payment or long service payment obligations. Pre-May 2025 accrued benefits can still be used under transitional provisions. For the full severance payment formula and the transitional MPF offset rules, see our severance payment guide.
For the full employer obligations on MPF contributions and payment deadlines, see our MPF payments guide. For the full overview of MPF scheme types and enrolment, see our MPF guide. For the broader picture of employee statutory entitlements including minimum wage, leave, and maternity pay, see our employee compensation guide. Employers must also comply with the statutory minimum wage of HKD 43/hour. Companies with employees must also file an annual Employer's Return (Form BIR56A) with supporting IR56B forms by early May each year. See our Employer's Return guide for the full filing process.
Double taxation agreements
Hong Kong has signed Comprehensive Double Taxation Agreements (CDTAs) with over 45 jurisdictions, including the UK, Germany, France, Singapore, Australia, and Mainland China. CDTAs prevent the same income from being taxed twice: once in Hong Kong, once in the treaty partner country.
CDTAs also set maximum withholding tax rates that treaty partners can impose on dividends, interest, and royalties paid from Hong Kong. Although Hong Kong itself imposes no withholding tax on outbound payments, the treaties protect income flowing in the other direction. For a full list of Hong Kong's treaty network and how to claim reduced rates, see our double taxation agreements guide. To claim DTA benefits, you need a Certificate of Resident Status from the IRD. See our Tax Residency Certificate guide.
Hong Kong profits tax deadline calendar
| Date / Trigger | Obligation | Who handles it |
|---|---|---|
| 31 March (or your year end) | Financial year closes; accounting records must be complete | Accountant |
| Within 1 to 3 months after year end | Audited financial statements prepared and signed | CPA auditor |
| April (each year from year 2) | IRD issues Profits Tax Return (BIR51) | IRD |
| Within 1 month of issue date | File BIR51 (or within extended deadline if represented by tax agent) | Accountant / auditor |
| Tax demand received | Pay profits tax (final + provisional) by due date | Directors |
| Before provisional tax due date | Apply to hold over provisional tax if profits declining | Accountant |
| Within 7 years of incurrence | Retain all financial records, invoices, contracts | Directors |
First year exception: The first Profits Tax Return is not issued in April. The IRD typically issues the first return approximately 18 months after incorporation, regardless of year end. A company incorporated in June 2024 with a 31 December year end would typically receive its first BIR51 in late 2025 or early 2026.
Tax agent extension: Most accountants registered with the IRD as tax agents receive a bulk filing extension, allowing BIR51 filing on a code-based extended schedule (as late as November for some return types). If Air Corporate handles your audit and tax filing, your return is filed within the extended deadline.
Air Corporate handles audit and tax filing for Hong Kong companies from USD 580/year. Includes CPA-audited financial statements, tax computation, and BIR51 submission to the IRD. Get started
