Hong Kong profits tax: a quick start guide to filing your company’s taxes in 2019

Hong Kong taxes corporate profits by the territorial principle; nonresident enterprises are liable to pay income tax only on profits earned in the region, while local corporations do not pay taxes on income generated overseas. The official Year of Assessment is between March 31st and April 1st the following year. However, it is permissible to set an accounting period ending on any date within the year of assessment as the basis period for that year of assessment. Hong Kong profits tax is calculated according to a flat corporate tax rate, with a choice between a single tier corporate tax regime and a two-tier system.

 

The single tier corporate tax is set at 16.5% for corporations, and 15% for unincorporated businesses.  The recently introduced two tier system taxes incorporated companies at 8.25% on the first HK$2 million, with the rest of their profits for the year assessed at a 16.5% profits tax rate.  Unincorporated companies pay half-rate (7.5%) on the first HK$2 million and  15% on the remainder.

 

Income earned through locally issued Qualifying Debt Instruments is eligible for a concessionary profits tax rate equivalent to 50% of the normal profits tax rate, (8.25% for corporations, 7.5% for unincorporated companies) and is not counted towards the HK$2 million profits under the two-tier system. 

 

Aside from the concessionary rate and exemptions for QDI, Hong Kong’s government has also issued a number of industry-specific incentives to ease the profits tax burden in certain sectors.

 

  • The purchase of electric vehicles for business purposes is fully deductible at 100% during the year of purchase.

 

  • Environmentally friendly machinery, installations or vehicles are also eligible for a 100% deduction in one year of assessment.

 

  • Renovation expenses for business premises can be written off for 5 years.

 

  • Hong Kong based funds are eligible for profits tax exemption for transactions in prescribed assets.

 

  • Local funds are also eligible for profits tax exemptions for local and overseas private fund investments.

 

  • Additional three categories of Intellectual Property Rights (Performance rights, plant varieties and layout design of Integrated circuits) are covered within the scope of tax deductions for capital expenditure.

 

  • Tax exemptions for income derived from mutual funds, unit trusts and similar investment schemes which meet specified requirements.

 

  • Captive insurers can claim a 50% reduction of profits tax on insurance business of offshore risks

 

 

Provisional Profits Tax

 

Hong Kong companies are required to pay provisional profits tax  which is charged by reference to the amount of taxable profits for the preceding year of assessment. It is paid in two instalments, the first of which covers 75% of the amount with the remainder due after three months. Any difference from the actual assessable profit will be adjusted in the final tax assessment as amount overcharged or undercharged. 

 

 

Tax Loss offset

 

Profits chargeable to Hong Kong profits tax are defined as net Income minus deductible expenditures, capital allowances and unused tax losses available for offsetting. Companies may be eligible for a more favorable tax bill by recalculating their profits according to eligible incentives when filing. Losses from one fiscal year can be  carried forward and set off against the following year’s profits. Owners of unincorporated businesses can also deduct company losses from their Hong Kong salaries tax (individual income) if they elect for a Personal Assessment.

 

 

Double Tax Agreements

 

Hong Kong has signed double tax agreements with over 35 countries. Various reductions and tax relief programs are available in signatory jurisdictions. Income earned outside Hong Kong is not subject to Hong Kong profits tax.  Any income earned in Hong Kong  but taxed overseas is eligible for a tax credit.

 

 

Audit Exemptions:

 

  • Unincorporated bodies

 

  • Companies incorporated in jurisdictions that do not require auditing

 

  • Local branches of foreign companies that are not subject to statutory audit requirements

 

 

Hong Kong’s profits tax regime for businesses is one of the most favorable in the region and a major attraction for international companies. When filing your company’s Profit Tax Return between May and November every year, you should be aware of the extent to which you can reduce tax liabilities. In addition to eligible deductions, you should be mindful of  the tax  concessions you are entitled to, tax treatments of various kinds of local or foreign source income, the tax basis period, important deadlines, and auditing requirements.

 

Our accounting and auditing services are staffed by experienced professionals who can prepare your financial statements and advise you on efficiently ensuring compliance with the ideal corporate structuring solutions. Please contact us with any enquires about accounting, auditing and tax services whether you are setting up a new company, considering a transition, restructuring or planning a merger or acquisition. With over 50 years of local experience, we are proud to continue serving the Hong Kong business community.

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