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 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 oversea, and whether or not your company derives profit from Hong Kong.
One primary advantage of operating a business via a HK company is linked to Hong Kong’s “territorial tax” system.
This is a simple way of stating that a HK company is only required to pay tax on profits derived from its Hong Kong operations.
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 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:
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 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:
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 a 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 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 which profits are derived from a business outside of Hong Kong (known as offshore companies).
The Hong Kong profit tax system allows 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:
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.
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:
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 the Hong Kong’s Inland Revenue Department 18 months after its date of incorporation.
Each year, your company needs to prepare and submit the following documents to the Inland Revenue Department as part of the profits tax assessment:
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.
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:
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.
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 company level, with no possible transfer or pooling of losses between companies of a same group.
Hong Kong has a territorial tax system and only taxes profits generated in of 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 risks of double taxation.
Failure or delay in filing profit tax return 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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