With its attractive corporation tax rate, Hong Kong is an ideal location for businesses to establish their business. What differentiates it from other cities is that tax filing tax returns is less complicated than in other locations, including Asian hubs like Singapore.
If your company is located located in Hong Kong or you plan to relocate, you’re likely to be wondering about the kinds of taxes companies are liable to, including the capital gains tax rate and how to calculate taxes you are required to pay. Let’s look into these issues to get a complete understanding. In addition, we’ll talk about the how to ensure you are completely prepared to file your tax return.
Then, let’s take a examine the different tax types that are due in Hong Kong
(and taxation of common items which aren’t required)
- Corporation tax or Profits Tax: It is payable on the net assessable profit of a company.
- Tax withholding: is extremely narrow in scope. It is only applicable to the payment of royalties as well as payments to entertainers from outside the United States. It isn’t a tax withholding for dividends or interest payments.
- Tax on capital gains is not applicable.
- No GST/ VAT
- Taxes on salaries are not deducted from the salaries of employees.
- Taxes on profits are not applicable to gains outside of Hong Kong.
- In general, dividends are not tax-free.
What is the profit tax rate?
Hong Kong has a Two-tiered Profits Tax Rates Regime. Limited companies are taxed for profits less than HK2 million at an amount of 8.25%. The those with profits over HK$ 2 million can be taxed up to 16.5 percent.
Further simplifying the concept, the only the income which is “revenue” in nature is tax-deductible. Capital gains are not tax deductible.
Here are a few examples of how this can be done.
- “Revenue in nature”: If you’re involved in the production of and selling t-shirts, the income from sales is a revenue in nature, and is tax-deductible.
- “Capital in nature”: If you’re engaged in the process of producing and selling t-shirts, then you could sometimes purchase a new t-shirt printing machine, and then sell an old model. Profits earned from the sale are not tax deductible.
How do you calculate Profits Tax?
To figure out the tax that you’ll be required to pay on your earnings and to determine your tax-deductible earnings by making an Income Tax Computation. This is the procedure:
- Find out your Net Income per Account. This is the starting point.
- + ADD Non-Deductible Expenses and Capital Losses
- – DEDUCT Non-Taxable Income
- – DEDUCT Tax Deductions
- = Assessable Profits/ Adjusted Loss
- – DEDUCT Loss carried forward from previous years
- = Net Assessable Profits
What are the definitions of these terms?
- Accounts with net earnings: They are called ‘net income per Audited Profit and loss.’
- Non-deductible expenses Non-deductible expenses: In Hong Kong, this includes the cost of government fines, accounting depreciation and other expenditures that are not legally recognized under the tax code.
- Capital losses Capital Gains aren’t tax-deductible. Thus Capital losses are not tax-deductible.
- Tax-free income: For example offshore profits, interest earned by banks
- Tax deductions: Certain deductions that are allowed by law, such as depreciation for tax purposes
- Loss that is brought forward: If the business suffered a tax loss in previous years, it could be carried forward until “used up” by future profits
For a tax estimate Apply the Two-Tier tax method to the Net Assessable profits. It is important to remember the fact that it’s a simple calculation and every business has specific requirements. A competent Tax advisor like Shepherd Asia can prepare this estimate for you.
Do we have to pay Taxes if the Profits were made in Countries other than Hong Kong?
What is it that means to being “offshore” for profits tax to be used for taxation purposes?
Hong Kong has a “territorial tax system”. This means that only the profits earned from Hong Kong are taxable here.
However, don’t think your business qualifies in the sense of “offshore” just because you have never visited HK and you don’t have clients in the country. The IRD establishes specific requirements in tax law which determine whether the profits of a business will be “onshore” or “offshore”. We suggest contacting us before incorporating your business within Hong Kong to ensure the correct documentation is in place.
A recent change in tax law means that some of the income previously thought to be offshore (and therefore tax-free) is now tax-deductible in HK. This is a result of demands from the European Union and applies to non-taxable income like dividends or interest, capital gain as well as IP-related income. Contact us for more information.
What is the Procedure for Profits Tax Returns?
The Annual Tax Returns for Profits are usually released from the Inland Revenue Department (IRD) every year on the 1st of April and are sent to the registered address of the business or to a third-party corporate secretary. The returns must be filed within a month, although extensions can be sought and usually granted depending on the company’s financial year-end.
If you are working with a tax professional the tax filing deadlines are based on the financial year-end of your company, Contact us to get help with this.
If you must pay tax on the island of Hong Kong, you are required to inform the tax authorities in writing within 4 months from the time that the tax year’s end to ensure that you get the annual Tax Return for Profits.
If you’ve received the Profits Tax return frequently and anticipate it to be received in the upcoming period, you don’t have to inform authorities. If, however, you’ve been informed that you won’t receiving your Profits Tax, especially if it’s your first tax payment within Hong Kong, or if you don’t receive the tax refund, you should inform the tax authorities promptly.
Documentation Requirements
If you are filing taxes, it is obliged to provide additional schedules and explanations to specific items like the amount of your fees, expenses and write-offs, donations and other items similar to them. It also lists profits from offshore and any other related expenses.
What are Provisional Tax and Final Tax?
In the initial tax return, you’ll be required to pay tax on the “final tax” for the tax year that’s ended and also the “provisional tax” for the current tax year.
Provisional tax is based on the assumption that the business has the same income tax deductible in the current year as it did in last year. Once the current tax year has ended and the amount of final tax due will be assessed against the provisional tax that was already paid. If there’s an overpayment the tax will be applied to the tax due next year in addition to any surplus being refunded.
What are the Tax Payer and Tax Return due dates?
For the majority of companies, Notices of Assessment are typically sent out every September. They inform each business of how much tax they are required to pay.
The payment deadlines usually fall in January and November. In November 75 percent from the amount (final plus proviso) is due. The remaining remainder is due in January.
Companies may apply for an instalment plan and the “holdover” of provisional tax (i.e. there is no provisional tax to be paid) provided they satisfy the requirements set in IRD. IRD.
For tax returns for profits due by the deadlines are based on the type of return you’re filing:
- N Code Returns: 2 May 2024
- D Code Returns: 15 August 2024
- M Code Returns: 15 November 2024
- M Code Returns & Current Year Loss Cases: 31 January 2025
Note: If you file electronically, deadlines are extended by one month, with the exception for the deadline that is last on our list.
Individual tax returns The deadline for tax returns will be due on May 2, 2024. If you do not have an sole proprietorship business, the tax deadline for filing your tax returns is 3 June 2024. If you own a sole proprietorship business The tax return deadline falls on 2 August 2024.
If you decide to employ a tax professional such like Shepherd Asia–you are able to extend the deadline.
In this instance, people who do not have a sole proprietorship business are able to submit their tax returns on profits on or before July 3, 2024 and those who have sole-proprietorship businesses are able to file their tax returns before the 2nd of October in 2024.
New Tax Items for Profits Returns will be introduced in 2024.
In light of recent changes to tax law, new tax provisions have been added into the profits Tax returns. The majority of them relate to connection with family-owned businesses, but some are related to income from foreign sources (sections BIR51 and BIR52). Find out more about them by going through our article on Tax Reforms of 2024 (FSIE and the TCES).
Tips for filing tax returns:
- Implement accounting practices as early as you can in your business.
Following incorporation, the first tax return won’t go to the tax payer until 18 months following incorporation. If you’re not on top with your accounting, there’s an enormous amount of work to do! - Keep track of the year in your accounting.
The most frequent reason people miss the tax deadline is allowing the tax filing to be completed in the very last minute. If you keep track of your accounts on a regular basis and completing your tax returns on time, you won’t need to deal with the stress that comes with deadlines. - Complete your tax return within a month from the date of an “Estimated Assessment”.
If a business does not complete a tax return the IRD will take an educated guess as to what the tax due could be, and send the company with an “Estimated Assessment”. If you fail to submit a completed tax return within one period of one month, your assessment is final. If your business made less money, you won’t receive a refund, however in the event that it earned more it is required to pay the tax that is different. - If you’re “offshore” for tax purposes make sure you file your tax returns and keep accurate documents.
The IRD’s role is to collect tax revenue, therefore in the event that your business is granted “offshore” status, the IRD will require you to not just submit a tax return every year, but also provide additional details to show that none of your profits came from Hong Kong. Remember that being classified “offshore” can increase your administrative burden, rather than reduce it.
If you need advice on the tax system that is in place in Hong Kong, reach us. We specialize in working with businesses in other countries. We can offer you the most up-to-date services and details.
