Small as it is, Hong Kong depicts a spirit of dynamism with the increasing number of local and foreign companies in the city.
In 2020, the Companies Registry reported a total of 99,405 newly registered companies while in 2019, the Annual Survey of companies reported 9,040 foreign companies in Hong Kong.
And as a savvy entrepreneur, most likely, you are eyeing to set up a business in Hong Kong. However, it helps to do your research on how to set up a business in Hong Kong, especially in the process of corporate tax filing.
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Hong Kong Corporate Tax
One thing that makes Hong Kong an attractive city to establish a business is its simple tax system and low tax rate.
An example of the simplicity of Hong Kong’s taxation system is reflected in its adoption of the territorial principle of taxation that does not differentiate taxes levied on residents and non-residents.
The profit tax is computed only on income derived from a business carried in Hong Kong. In addition, the applicable tax rates are very minimal.
Read on to learn more about Hong Kong corporate tax filings, general corporate taxes, tax incentives, and how to file a profits tax return in Hong Kong.
What is a territorial corporate tax system?
The territorial corporate tax refers to a system of imposing profit tax only on profits derived locally. This means companies pay taxes only in the countries where they generated profits.
Hence, you are obliged to pay profits tax if you generate income from a profession or business in Hong Kong. However, income derived from overseas are exempted from taxes, regardless of whether these are sent to Hong Kong.
The general rule in determining a profit tax liability is that the company carried its business in Hong Kong and has generated profit from its operation.
Here are the advantages of territorial taxation in Hong Kong:
- you are not obliged to pay sales taxes, including value-added taxes
- interests income and dividends are not taxable
- dividends received from both domestic and foreign companies are not subject to tax
How to determine taxable business companies profits?
If you are planning to incorporate a business in Hong Kong, you can choose between the single-tier and the two-tier profit tax system.
Single-tier tax system
Incorporated companies that choose the single-tier corporate taxation can expect to pay the normal profits tax rate of 16.5% of their company’s assessable profits while unincorporated businesses pay 15%.
Two-tier profit tax
According to the Inland Revenue Department, incorporated and unincorporated companies can expect a concessionary tax rate for the first $2 million of assessable profits under the two-tier profits tax system.
As per the revenue department, incorporated companies are liable to pay a concessionary tax rate of 8.25% of the first $2 million, while unincorporated businesses are expected to pay 7.5% of the first $2 million.
The assessable profits over $2 million will pay 16.5% for incorporated businesses and 15% for unincorporated entities.
The adoption of a concessionary tax rate is expected to bolster the competitiveness of Hong Kong as the world’s business hub.
However, in order to avoid double benefits, the IRD imposed an exclusion rule, so that the following enterprises are deemed excluded from the two-tier tax scheme:
- Entities that elected the preferential half-rate tax, such as a qualifying corporate treasury centre.
- Assessable profits arising from qualifying debt instruments, as the gains from these securities are subject to a tax at half the normal corporate tax rate.
- Only one member from a group of companies in HK shall be eligible for the two-tiered tax program
The assessable companies profits
In filing the profit tax return, it is important to know what to include as the entity’s assessable profits.
As per the definition provided by the Inland Revenue Department, assessable profit refers to the net profit or loss for the taxable period.
The amount arises from the business operation carried in Hong Kong and is calculated based on the provisions set forth by the Inland Revenue Hong Kong Ordinances.
As per the Inland Revenue in Hong Kong companies Ordinance, there are amounts that should not be included in the assessable profits of a business.
Here are the sums that are excluded from the computation of assessable profits:
- dividend income distributed by a corporations if its income is subject to Hong Kong profits tax
- sum received from a person whose assessable profits are subject to profits tax
- income generated from interest, as well as profits from long-term debt instruments
- in general, all profits derived from a profit that is already subject to tax
When to pay your corporate taxes?
After its incorporation, a company in Hong Kong is liable to pay taxes for income arising from its operation. The tax authority will issue profit tax returns for the initial year of assessment.
The company shall submit the tax returns form to the Hong Kong Inland Revenue Department within a month after receipt of the return. However, the deadline for submission can be extended up to 2 weeks for filings done electronically.
Even in the absence of corporate profits tax returns from the tax authority, a company is expected to inform the IRD should assessable profits derived from its operation.
The last day of submission is written on the profits tax return. Remember to submit the return on or before the specified due date to avoid paying for penalties and more taxes.
Types of profits tax return forms
- BIR51 – profits tax return for corporations
- BIR52 – tax return for persons other than corporations
- BIR54 – return for non-resident persons
Basis of year assessment of Hong Kong companies profits tax
Corporate income tax in HK is determined based on the year of assessment, which is the 31st of March. For instance, the income tax basis period for the year ended 31st March 2022 is referred to as the year of assessment 2021-2022.
The accounting profit is adjusted for tax purposes, and the return is filed together with relevant attachments such as the tax computation, audited accounts, and other supporting documents in a year.
A branch of a company not incorporated in Hong Kong, but operating in the city is still required to file tax returns. In addition, the branch may present the audited financial statements of a foreign company to support the profit tax returning of the Hong Kong branch.
As per the definition provided by the IRD, you may not need to submit supporting documents if you are operating as a small corporation. However, you are still required to maintain a copy of these documents and submit them when requested by the tax authorities.
Notice of assessment
After receipt of the tax return, the IRD will issue the notice of assessment. As a taxpayer, you can expect a post-assessment investigation of your accounts based on either the audit risks findings or a random electronic selection by the IRD.
Tax payment
Hong Kong company tax is simple and efficient.
The profit tax payable is based on the profits derived from the operation of the business within the year under assessment.
That being so, it is not possible to come up with the exact amount of assessable profits by the end of the year under assessment. Thus, the need for a provisional tax, which is an estimated year tax computed based on amounts derived from the previous year.
The provisional tax
The provisional profits tax is paid in two installments, with 75% of the estimated tax paid on the first installment and the remaining 25% to be paid after three months.
The provisional profit tax paid shall be deducted from the assessed tax on the final profits. Any excess or outstanding payments will be deducted or added on the first installment of the provisional tax in the following assessable year.
The customary procedure is to issue the request for provisional tax along with the notice of assessment for the year. The due date for payment of the taxes is provided on the documents issued.
Do not be confused between the profits tax returns and provisional tax.
The latter is established to encourage taxpayers to pay tax on time for profits of their business carried in Hong Kong. This scheme is helpful to all business owners as they can pay smaller amounts of taxes.
Tax incentives available to corporate entities in HK
A discussion of Hong Kong tax is not complete without going over the incentives available to corporate taxpayers in the city. For one, what makes Hong Kong one of the most attractive cities to invest in is the availability of a wide range of tax incentives.
As per the IRD, here are some of the tax incentives for entities in Hong Kong:
- tax concession on mutual funds and trusts investments
- exemption from tax of the capitalized cost of renovating the company Hong Kong premises incurred during the five-year write-off period
- profits tax exemption of investments in high-value manufacturing and production ventures
- exemption from tax of capital expenditures in the acquisition of environmentally sustainable vehicles and machinery
- profits tax exemption generated from the fund investments
FAQs
What are the consequences of failure to submit the profits tax return form on time?
You have a month to complete and submit the profits tax return. However, you can request an extension should you find the allotted time insufficient to complete all the requirements.
Does Hong Kong have sales tax filing?
NO! Hong Kong is leading the race towards the title as the best place to do business in Asia.
And its competitive position can be attributed, partly to the fact that Hong Kong does not impose a value-added tax or any other form of sales tax.
As a company incorporated in Hong Kong, what are the documents that I need to submit to the tax authorities?
You may want to submit the profits tax return, including your audited financial statements, tax computation and other supporting documents when necessary.
Does Hong Kong impose capital gains taxation?
NO! The HK government and its tax representatives do not levy capital gains tax and do not consider capital losses as deductible expenses.
What is the tax treatment of foreign real estate owned by a resident in Hong Kong?
Income from off-shore real estate, including the capital gained from its sale, is not subject to tax in Hong Kong.
Are there penalties for non-compliance against income tax laws in Hong Kong companies ordinance?
Definitely. Taxpayers in Hong Kong limited company are expected to observe a high degree of compliance and should file accurate returns on time to the IRD.
Failure to comply empowers the Commissioner to impose punitive consequences such as assessing penalties and additional taxes, as well as instituting prosecution.
What are factors that affect the severity of the penalty for non-compliance against tax laws?
- strength and validity of evidence
- amount of tax undercharged
- the sophistication of the strategy, which reflects the intent to avoid paying the actual tax payable
- the period over the fraud was done
Remember to comply with the requirements of the IRD to avoid the threat of possible imprisonment and additional taxes.
As a prudent business owner, you do not want to risk paying a hefty HK50,000 and other fines for undercharged amounts in your returns.
Your Next Step
Do not let the scary thought of getting your taxes wrong deter you from starting a business in Hong Kong.
If you are looking for a tax expert to help with your tax requirements, tax filing, look no further.
Let a member of ReachTop KSHK clear the tax return problem out of your plate, guides you, so you can focus on the core operation of your business.
Talk to us today!