Introduction
Hong Kong is renowned for its simple and low tax regime, making it one of the most business-friendly jurisdictions globally. This guide provides a comprehensive overview of Hong Kong's profits tax system, including income tax rates, corporate tax structures, profits tax returns, and tax incentives.
Hong Kong's Corporate Tax System
Hong Kong adopts a territorial system of taxation, meaning that tax is levied only on profits arising in or derived from carrying on a trade, business, or profession in Hong Kong. Profits sourced outside Hong Kong are not subject to profits tax, even if remitted to Hong Kong. This territorial principle applies equally to residents and non-residents. Thus, non-residents deriving profits from Hong Kong are liable for profits tax.
Corporate Tax Rates
Hong Kong's corporate tax rate follows a flat-rate principle with two options:
Single-Tier Corporate Tax System:
Corporations: 16.5% on assessable profits.
Unincorporated businesses: 15%.
Two-Tier Profits Tax Regime (effective from the Year of Assessment 2018/19):
Corporations:
First HK$2 million of profits: 8.25%.
Profits over HK$2 million: 16.5%.
Unincorporated businesses:
First HK$2 million of profits: 7.5%.
Profits over HK$2 million: 15%.
Only one entity within a group of connected entities can benefit from the two-tier rates. The group must identify and elect the entity that will enjoy this benefit.
Assessable Profits | Corporations | Unincorporated Businesses |
First HK$2 million | 8.25% | 7.5% |
Over HK$2 million | 16.5% | 15% |
Tax Incentives in Hong Kong
Hong Kong offers several tax incentives to enhance its competitiveness and attract investment:
Profits Tax Exemption for eligible onshore and offshore funds.
100% Write-Off for new expenditure on plant and machinery for manufacturing, and on computer hardware and software owned by end-users.
5-Year Write-Off for capital expenditure on the renovation or refurbishment of business premises.
Tax Concessions for mutual funds and trusts.
Tax Exemption for interest derived from deposits placed in Hong Kong with authorized institutions.
100% Deduction for capital expenditure on environmental protection machinery and vehicles.
Concessionary Tax Rates for qualifying debt instruments (QDIs), corporate treasury centers, aircraft leasing, and reinsurance businesses.
Profits Tax Deduction for intellectual property rights purchases, effective from April 2018.
Compliance and Reporting
Hong Kong's corporate income tax is assessed based on the Year of Assessment (YA), which runs from April 1 to March 31 of the following year. The assessable profits are determined based on the accounting period ending within that YA.
Filing Profits Tax Returns: The Inland Revenue Department (IRD) issues corporate profits tax returns on the first working day of April each year. Deadlines for filing can be extended under certain conditions:
No Extension for financial year ending between April 1 and November 30.
Extension until August 15 for financial year ending December 31.
Extension until November 15 for financial year ending between January 1 and March 31.
Newly registered businesses receive their first profits tax return 18 months after the date of commencement or incorporation. The returns must include the profits tax return form, a supplementary form, a certified balance sheet, auditor’s report, profit and loss account, tax computation, and other specified documents.
Profits Tax in Hong Kong: Special Tax Treatments
Qualifying Debt Instruments: Profits derived from QDIs are taxed at a concessionary rate or exempted, depending on the issuance date and conditions met.
Islamic Bonds (Sukuk): Receive the same tax treatment as conventional bonds.
Privately Offered Funds: Both onshore and offshore funds enjoy profits tax exemption on specified transactions.
Tax Treatment of Losses
Losses incurred during an accounting year can be carried forward to offset future profits within the same trade. Corporations engaged in multiple trades can offset losses from one trade against profits from another. Specific rules apply to adjust losses between concessionary and standard trading activities.
Depreciation Allowances
Hong Kong provides depreciation allowances to reduce tax burdens:
Industrial Buildings: Initial allowance of 20% and annual allowance of 4% on construction costs.
Commercial Buildings: Annual allowance of 4% on construction costs.
Plant and Machinery: Initial allowance of 60% and annual allowance at prescribed rates (10%, 20%, or 30%) on reducing value.
Donations and Exemptions
Charitable Donations: Deductible if made to approved charitable institutions or the government, totaling at least HK$100 but not exceeding 35% of adjusted assessable profits.
Exemptions: Include dividends from taxed corporations, certain interest incomes, and profits from specific investment schemes.
Foreign-Sourced Income Exemption (FSIE) Regime
To prevent tax avoidance through offshore claims, the FSIE regime taxes specified foreign-sourced income received in Hong Kong by multinational enterprise (MNE) entities unless certain conditions are met. This includes interest, dividends, disposal gains, and IP income.
Conclusion
Hong Kong’s profits tax system, characterized by its territorial principle and competitive rates, is designed to foster a favorable business environment. The various tax incentives and simplified compliance requirements further enhance its attractiveness as a leading global financial hub.
Comments