Paying taxes is an integral part of doing business in Hong Kong. Every resident and non-resident who derived profits from transactions in Hong Kong must pay taxes.
That said, Hong Kong company tax planning is a must for an entrepreneur who wants to save taxes and adhere to tax-related guidelines.
Remember that there are various tax reduction opportunities available to Hong Kong entrepreneurs.
This blog post will outline corporate tax planning, the advantages of a proper tax plan, the most popular tax strategies, and tips on how to make the most of tax plans.
Table of Contents
What is Corporate Tax Planning?
Corporate tax planning is designing tax-saving schemes to reduce tax burdens. It is also used to adhere to the requirements of the Inland Revenue Department, which is the main tax authority in Hong Kong.
The goal is to use legal tax treatments to reduce the tax burden while complying with the guidelines issued by the tax authorities.
For example, an HK company may deduct expenditures such as depreciation, interest payments, and rent to arrive at the taxable income.
An entity may also consider debt financing and claim interest expenses as deductions in the income tax return.
However, filing and paying tax involves more than submitting a profits tax return to the Inland Revenue Department.
It consists in making financial and business decisions early in the fiscal year and ensuring the documentation and management of every relevant transaction.
Basic Principles and Guidelines in Hong Kong Company Tax Planning
Hong Kong adopted the territorial basis of taxation, which means the tax payable is computed solely on profits derived from Hong Kong.
Thus, the compliance laws in HK require every taxpayer to declare their income and assets, including the following:
- interest income
- inheritance
- proceeds from the sale of capital assets
- intangible property
- immovable property
- dividends from capital gains
- other sources of income
However, ascertaining the source of profits can become challenging, especially for Hong Kong companies that generate sales profits in other countries.
Below are factors to consider when determining the tax treatment of profits under certain conditions:
- The locality of trading profits. The trading profits from sales negotiated and concluded in other countries are tax exempt.
- The locality of service profits. A Hong Kong service company may request exemption from tax of service income attributable to services offered in different countries.
- The locality of manufacturing profits. A Hong Kong manufacturing business may apply a 50% exemption for profits from a processing arrangement with an entity in Mainland China.
- The locality of e-commerce profits. In hong Kong, owners of e-commerce businesses may need to pay profit taxes for income from sales made in Hong Kong.
The Benefits of a Proper Tax Plan
Tax plans help businesses reduce their tax obligations through a detailed presentation of deductible expenses and adjustments.
Save Time and Reduce Errors. A proper plan can help you save time and avoid errors when filing your taxes.
In addition, you can make tax preparation easier with an organized system of tracking income and expenses. This strategy ensures you don’t miss important deadlines during the financial year.
Lower Tax Burdens. A tax plan helps in lowering tax obligations. With maximized tax savings, entrepreneurs can make the most of their resources, make decisions faster, and grow their businesses.
Enables Future Business Growth. Entrepreneurs planning how they will file and pay taxes are in a better position to achieve growth. By carefully managing their tax obligations, businesses can free up cash flow to reinvest in their business.
Reduces stress. Finally, by taking care of your taxes throughout the financial year, you can avoid the last-minute scramble and the anxiety that comes with it. This can give you peace of mind and allow you to focus on other aspects of your company.
Tips on how to make the most of tax planning opportunities
The Inland Revenue Department implements new laws and issues new guidelines every other year. So it is good to review this further information.
You wouldn’t want to submit inaccurate information to the taxing authorities as a business owner. Below are some tips to keep in mind when managing taxes in Hong Kong:
Set up a company in an Offshore Jurisdiction
One popular strategy is to avail of tax relief by setting up a company in an offshore jurisdiction.
Remember that Hong Kong adopts the territorial basis of taxation, which means your total income derived from foreign companies operating outside of Hong Kong should not be taxed.
Here are a few things to keep in mind if you are considering this option:
- ensure that your company meets all the requirements to be registered in an offshore jurisdiction
- consider how running a business in another country will affect your operations in Hong Kong
- make sure you are complying with the relevant legislation in both jurisdictions
If you are considering setting up a company in an offshore jurisdiction, speak to a qualified tax advisor to learn more about the pros and cons of this strategy.
Claim Expenses and Deductions
To reduce tax liabilities, business owners in Hong Kong must track expenses incurred and ensure they are eligible for deductions.
If you consider claiming expenses as deductions, speak to a qualified tax advisor to learn more about this strategy.
Review Tax Returns Regularly
A regular review of tax returns may alert you of transactions that qualify as tax exemptions.
These transactions include charitable donations, bonus payments, and taxes paid on employees’ remuneration.
Get Familiar With Hong Kong’s Tax Compliance Laws
Hong Kong’s tax system can be quite overwhelming for those who are not familiar with it.
Despite its low tax rate and excellent tax regime, there are different tax return forms to file and a set of laws to comply with in Hong Kong.
Maintain Accuracy of Financial Information
Having a good set of accounts and financial reports is important to plan your taxes effectively and keep track of your income and expenses.
A good strategy can help your company save money and reduce unnecessary costs. In addition to having accurate financial statements, it is also important to submit your tax return forms on time.
Planning is essential in this process.
If you are a business owner in Hong Kong, consider these strategies and speak to a qualified tax advisor to determine which option would be most beneficial for you.
Filing of Corporate Tax in Hong Kong
Tax filings in Hong Kong are done annually, and taxpayers must provide information about their finances, a list of properties, debts, and equities.
In most cases, you will need the assistance of an accountant to prepare relevant documents and file your company’s tax return.
Accountants help corporations file their tax returns with the Inland Revenue Department.
Click here to learn how Reachtop KSHK CPA Limited helps business owners prepare and file returns.
Hong Kong Tax Plan FAQs
What are the three annual tax returns issued by the Inland Revenue Department?
The annual tax returns issued by the IRD are the Employer’s return, profits tax return, and individual tax return.
How is tax evasion different from avoidance?
Tax evasion refers to the illegal action of willfully avoiding paying taxes. These illegal acts may include underreporting of income, claiming false tax deductions, and failing to file returns as per the provisions of the Inland Revenue Ordinance.
In contrast, tax avoidance refers to the legal practice of minimizing taxes. These schemes include making the most out of tax adjustments and tax-deductible options.
It is important to seek the assistance of a qualified accountant to ensure that the Inland Revenue Department approves the information reported in the tax return.
What is the difference between short-term and long-term tax plans?
Most entrepreneurs resort to short-term and long-term strategies to help reduce taxes levied on their trading profits.
Short-term planning refers to strategies implemented in the current year to minimize taxes for income received that year.
Long-term tax planning, on the other hand, includes a more holistic view of business activities and aims to cut down taxes over several years.
There are benefits and drawbacks to both approaches. Short-term tax planning helps reduce tax obligations in the current year, but it may not be the most efficient way to reduce overall tax liability.
Long-term planning, while it may take longer to see results, can ultimately result in better financial outcomes in the long run.
What is the basis of the Hong Kong profits tax?
The HK profits for tax purposes are calculated based on the accounting profit after adjusting taxes.
Hong Kong uses a territorial basis of taxation, which means tax is imposed on assessable profits arising solely from Hong Kong sources.
These profits can be directly related to trading, manufacturing, services rendered, and other income sourced in Hong Kong.
Thus, even non-residents carrying on their business in HK must pay taxes on profits sourced from Hong Kong SAR. The only exception is when a non-resident is from a jurisdiction that has entered into a tax treaty with HK SAR.
Are Hong Kong residents obliged to pay corporate tax for profits from an offshore company?
Residents in Hong Kong who operate offshore companies are not required to pay corporate taxes on income derived from these companies.
However, they may need to present supporting documents to prove to the Inland Revenue Department that their income is not subject to taxes.
Conclusion
There are several strategies that business owners in Hong Kong can use to save taxes on their business operations.
By carefully planning their tax strategies, entrepreneurs can minimize their tax burdens.
ReachTop KSHK CPA Limited can help entrepreneurs in Hong Kong with tax-related issues by providing professional and comprehensive services.
Our team of experts can provide tailor-made solutions suitable for your business, ensuring that you comply with the latest tax regulations.
