With a taxation system that is low, simple, and very efficient, Hong Kong has one of the most tax-friendly systems in the world for businesses and individuals.

Learn more about the applicable tax rates and the exemptions and deductions available to taxpayers through this guide to Hong Kong SAR corporate taxes and profits.

Table of Contents

Hong Kong profits tax

With the exemption of profits from the sale of capital property, all profits derived from carrying on any trade, profession, or business in Hong Kong are subject to tax.

Note that as to the exemption, profits gained from the selling of property as part of a profit-making scheme are taxable as per the prescription of the Inland Revenue Ordinance.

Here are the key features of the Hong Kong SAR profits tax system:

• Trading receipts from sources within Hong Kong are taxable
• Capital gains in Hong Kong are not subject to capital gains tax
• Dividends derived from local companies are generally exempt from tax
• Dividends from overseas companies are not subject to tax as the source is classified as offshore in nature
• Tax exemptions are available, such as tax exemption of certain interest income of non-financial institutions, an income of non-resident investment funds, and qualifying debt instruments
• Income derived from a foreign source are not taxable even if sent to Hong Kong

Basis of Corporate Tax in Hong Kong: Territorial Corporate Tax System

Hong Kong SAR taxation follows a territorial taxation system, which basically requires taxpayers to establish where revenues are derived.

As to profits tax, there is no tax rate distinction between residents and non-residents in Hong Kong.

So, you can be a Hong Kong resident, but you don’t have to pay taxes on profits derived from a venture outside Hong Kong SAR. On the other hand, non-residents are required to pay taxes for profits gained within Hong Kong.

Income Tax Basis Period

Corporate income taxes are regulated in Hong Kong on the basis of assessable years of taxation.

Profits tax is determined based on the assessable profits for a year of assessment (YOA), which starts from 1 April of a year to 31 March of the following year.

For tax purposes, the basis period of a year of assessment is usually the accounting period ending in the year of assessment.

Worth mentioning is the fact that the tax authorities in Hong Kong routinely watch new companies, and issue a tax return for the first expected “year of assessment (YA)”.

In instances when no tax return has been furnished, the corporation has the responsibility to inform the tax office if assessable earnings have been realized.

The YA runs from the 1st of April to the 31st of March, where tax liabilities are computed based on the adjusted profit or loss of the relevant year.

Below are the typical filing deadlines in Hong Kong SAR:

Flat Corporate Tax Rate: The Two-Tier Profits Tax Rates Regime effective from Year of Assessment 2018/19

Hong Kong companies are taxed based on either a single-tier corporation-tax or a single-tier corporation-tax system.

Single-tier corporate tax

The single-tier corporate tax system is a profits tax where the tax computation on corporate income is considered as the final profits tax assessed.

With that being said, the shareholders’ dividend income is exempt from tax payment.

The one-tier corporate taxation system simplifies the computation of tax and minimizes the compliance and administrative cost for companies.  Companies have a greater incentive to distribute dividends derived from capital gains, which may result in a higher dividend payout.

Double-tier corporate tax

The Two-Tier Profits Tax Regime is applicable to both corporations and unincorporated companies.

This taxation scheme that commenced from the YA 2018/2019 imposed the following guidelines:

• A tax calculation based on a tax rate of 8.25% is computed on the first HK$2 million profits of corporations.  A tax rate of 16.5% is computed on the remaining profits over HK$2 million.
• A tax computation based on a tax rate of 7.5% is computed on the first HK$ 2 million of profits of unincorporated businesses. A tax rate of 15% is computed on the remaining profits over HK$2 million.

The two-tier prices are available to only one “entity” within a group of “linked entities.” To do this, the group must first determine which entity would profit and then select accordingly.

Tax returns

Hong Kong’s Inland Revenue Department issues the profit tax return (PTR) on the first working day of April. Companies often apply for an extension within a month after receipt of the profit tax return.

Profits tax filing example:

• A profit tax return will be issued to a company on the first working day of April 2019 for Hong Kong fiscal year starting on the 1st of April 2018 to 31th of March 2019.
• A company financial year that runs between the 1st of April and ends on 3oth of December 2018 will not merit an extension. A profit tax return should be filed for the company between a month after receipt of the PTR.
• A company financial year that runs between the 1st of January and ends on the 31st of March 2019 merits an extension until the 15th of November 2019.

Newly registered companies can expect to receive the profits tax return from the Inland Revenue Department 18 months after the commencement of business.

Documents to prepare for a complete set of profit tax returns:

• the profits tax return form provided by the IRD
• a certified copy of your financial statements, such as the balance sheet, profit and loss, and auditor’s report
• a tax computation that shows the supporting schedules on how the assessed profit or loss was determined; and
• other documents as described in the notes.

Companies, other than those that are categorized as small company, are required to submit all of the supporting documents together with the PTR.

For a business described as a small company, you are required to submit the PTR and the supplementary documents only. Still, you have to keep the supporting documents as the IRD may require them later.

Statute of limitations

A statute of limitations refers to a duration of time provided by law by which to examine and resolve tax-related issues.

As per the tax laws in Hong Kong, a different tax assessment is needed in instances when a taxpayer is not assessed for tax or is not assessed at the correct tax rate.

The general rule provided through the statute of limitations is six years, which can be extended to ten years for cases that involve willful evasion or fraud.

What is a provisional profits tax?

Profit tax is determined based on the profit assessable for each yearly assessment.

A provisional profits tax is an estimated amount based on the assessable income of the previous year. This tax has to be put in place, as the actual assessable profits have yet to be determined after the end of the taxable year.

The provisional profits tax paid is matched against the assessable profit after the actual amount is determined by the end of the year.

Payment of taxes

Assessable profits tax in Hong Kong is paid in two installments.

Upon filing your Hong Kong tax return, the tax authority issues a notice of assessment with specifications of the deadline for payments.

The assessment notification includes a provision for the next assessment year’s tax payment. 

Upon receipt of the profits tax assessments, companies including unincorporated businesses are mandated to pay their provisional tax. The tax authority determines the provisional tax based on the profits tax of the preceding year.

Note that you are not required to pay the provisional profits tax, and you can even request a reduction in the amount of provisional tax payable.

Penalties for non-compliance and underpayment of taxes

You don’t want to get in trouble for failing to file your tax return or pay Hong Kong tax on your assessable profits.

According to the Inland Revenue Department, a penalty of HK$ 10,000 is imposed for failure to file a profits tax return or notify liability to tax on assessable profits.

Penalties are imposed on these acts of non-compliance as the repeated act of not rendering tax returns is considered as tax evasion.

An important thing to note that is filing your return does not merit a time extension to pay the tax liability. You are still expected to pay the tax on your adjusted assessable profits by the deadline.

Relief from double taxation

What constitutes double taxation?

Double taxation refers to an instance where the income derived from a single source is taxed by two or more tax jurisdictions.

Hong Kong residents rarely experience double taxation, given Hong Kong’s adoption of the territorial basis of taxation.  Moreover, many countries provide a unilateral tax credit for their residents operating businesses in Hong Kong.

Therefore, the majority of businesses that operate in HK do not have issues with double taxation on their assessable profits.

Notwithstanding the rarity of double taxation in the region, the HK government recognizes the importance of a tax treaty or comprehensive double tax agreements (DTA).

The DTA allows investors to determine their potential tax liability.

Also, it provides an added incentive for foreign investors to bring their business to Hong Kong, and for Hong Kong companies to expand their operation abroad.

How to treat losses for tax purposes

In the computation of profits tax, the tax losses are carried forward for an unlimited time period and offset against the taxpayer’s future taxable profits.

Tax avoidance, which is an accounting scheme with a sole or dominant purpose of reducing assessable profits and tax is perfectly legal in Hong Kong.

However, the Inland Revenue Department may invoke anti-avoidance provisions for attempts to avoid taxes. Here are some of the deliberate attempts to avoid tax on assessable profits:

• use of artificial and fictitious transactions to mislead the tax authority
• forging of transactions with the sole or dominant purpose of obtaining a tax benefit or tax exemption
• use of tax loss companies

Recently,  HK SAR adopted specific anti-avoidance legislation to prevent the purchase of a loss company for the sole or dominant purpose of securing a tax benefit.

Tax incentives available in Hong Kong

Tax incentives have been used as a policy tool to promote economic development and create opportunities for entrepreneurs in Hong Kong.

Here are preferential activities available to a Hong Kong company looking to take advantage of tax incentives and reduce tax liability:

• a deduction for research and development expenses
• tax benefit in the form of expanded tax exemptions for both onshore and offshore funds
• tax exemptions for gains derived from qualified debt instruments
• tax concessions for qualifying aircraft lessor and ship lessors
• profits tax exemption for all funds operating in Hong Kong starting from April 1, 2019,
• a fund may also benefit from a tax exemption on profits derived from local and overseas investments
• a tax concession on qualifying corporate treasury centre

What are tax concessions?

The Inland Revenue Department imposed a corporate tax of 16.5% on assessable profits.

However, the HK government passed often pass tax concession bills to bolster its economy.

A tax concession refers to a corporate tax rate reduction or tax adjustments granted by the government to a particular organization. For example, instead of the normal profits tax rate of 16.5%, qualifying corporate treasury centres are required to pay a concessionary tax rate of 8.25% on their qualifying profits.

Tax treatment of charitable institutions in Hong Kong

Section 88 of the IRO states that charitable institutions are exempt from paying taxes after meeting certain conditions.

The general rule is that charity should be founded solely for charitable purposes. Moreover, non-profit making organizations must be registered to qualify as approved charitable institutions.

The charitable purpose can be any of the following:

• the objective of relieving poverty
• advancement of religious objective
• betterment of education
• other purposes that are considered as charitable in nature, and result in the common good of the community

FAQs

What is the difference between provisional tax and income tax?

Provisional tax is a way of paying the income tax in advance. Therefore, the former is not separate from Hong Kong profits tax, though a taxpayer may need to pay the provisional tax to avoid having to pay a large chunk of the tax payable during an assessment.

Is Hong Kong a tax haven?

With a very simple taxation system and low corporate tax rate, Hong Kong is considered a tax haven.

HK has a highly acceptable regulatory regime that supports a transparent tax system so that many local and overseas entrepreneurs establish their businesses in the region.

With a minimal corporate tax rate, entrepreneurs are assured of a higher return and better future profits arising from their operations.

What taxes do you pay in Hong Kong?

You pay only three types of taxes in Hong Kong. These are the profits tax, salaries tax, and property tax.

What are the taxes that are not imposed in Hong Kong?

As a tax-friendly region, business organizations and individuals enjoy a simple tax system in Hong Kong.

The taxes that Hong Kong SAR does not impose include tax foreign income, sales tax, withholding taxes on interest income received, tax on profits arising from dividends, and estate tax.

Wrap Up

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