Tax filing for your Company
The Hong Kong tax filing advantages in Hong Kong are notable for locally incorporated companies.
Hong Kong is situated in the south-eastern part of the Mainland China, where it covers about 1,100 square kilometers. This territory includes the Hong Kong Island, Kowloon, the New Territories, and the 235 outlying islands. It is a former British Colony, that reverted to the Chinese government on 1st July 1997, and is now a Special Administrative Region of the People’s Republic of China. It also retains its current legal, commercial, social, and political system for a minimum of 50 years. But the legal system of Hong Kong is different from China, which is one reason why the Hong Kong Tax filing is easy.
In short, the English common law prevails where the Chinese government has promised a state based on the beliefs of “No change for 50 years” and “One Country, Two Systems.” Hong Kong maintains the laws that were there during the English rule, and the Chinese have guaranteed a mature and stable system. This also makes the filing of taxes in Hong Kong easy and a straightforward process. Let us understand the state of Hong Kong in terms of finance and the legal laws along with all the benefits that we can get from it.
Hong Kong has the world’s most modern and open economies in the world, where it is a world-renowned service and business hub and a prosperous city. Hong Kong has a very understanding market that works smoothly with both the Chinese market as well as the international market. The language spoken here is Cantonese, a Chinese dialect, though English is often spoken and even incorporated into the local language.
The Hong Kong tax filing advantages in Hong Kong are notable for locally incorporated companies, though it has not been referred to an offshore financial center. It is also a financial center that has a large number of venture capital companies, fund managers, merchant banks, insurance companies, a broad representation banks, and other financial intermediaries.
The taxation system in Hong Kong is entirely based on the territorial source principle and not on the residency or management and control. This means that the HK companies have to pay the tax only if the tax profits are sourced in Hong Kong, where the tax rate is currently 16.5% on the assessable profits. And those profits that have been sourced out of Hong Kong are not liable to the tax and are not included in the filing of taxes in Hong Kong.
Additionally, there are no inheritance tax, no taxes on capital gains, no withholding taxes on interest paid to foreign creditors, and no withholding taxes on dividends paid to foreign shareholders. Isn’t this just the best thing?
Doing business without paying tax
Hong Kong is a significant location for international companies in the Asian Pacific Region. As mentioned above, the HK companies can be structured as a tax-free entity where the territorial origin definition of profits predominates. And due to this, the company can avoid assessable profits for taxes in Hong Kong even though the company is running in Hong Kong. However, the company still has to have tax filings, but declare that their profits were outside of Hong Kong.
The professional advice is important to make sure that the stabilized financial relations do not trigger a tax liability in Hong Kong. Even though the tax is not applied to the foreign-sourced profits, it is vital to structure the business operations by the best practices. Due to the important trading economy of Hong Kong, the companies here do not have an international or tax haven image.
If you have any questions about the Hong Kong tax regulations or Hong Kong’s territorial source principle, Startupr can advise you on the tax laws and implications for your company. We have years of experience of handling these cases, and are dedicated to providing you the best advice for your company.
Now moving back to the topic which lets us know about filing of taxes in Hong Kong, and why exactly the entrepreneurs and foreign investors are selecting Hong Kong as their favored jurisdiction for initiating and expanding their businesses. Some of the reasons why has been shared below:
- The ease of setting up and running a company in Hong Kong.
- Vicinity to the mainland Chinese market.
- Profoundly attractive tax regime – no interest or collection of social security benefits, no withholding tax on dividends, no sales tax or value-added tax, no capital gains tax, territorial tax scheme and low corporate and personal tax rates.
Hong Kong Tax Governing Authority
Since the main topic here is about the Hong Kong tax filing, we need to understand who governs the taxation in Hong Kong. The IRD, that is also known as the Inland Revenue Department, is the reigning government body and is authorized in obtaining funds in a cost-effective and efficient manner. Moreover, it even aims at promoting the compliance via meticulous implementation of publicity programmes, education, and law.
The Inland Revenue Ordinance and its subsidiary legislation, which is the Inland Revenue Rules, is the regulatory ordinance considering individual and corporate taxation matters in Hong Kong. Lastly, The Inland Revenue’s Commissioner is responsible for the management of the subsequent Ordinances: Hotel Accommodation Tax Ordinance, Business Registration Ordinance, Tax Reserve Certificates Ordinance, Stamp Duty Ordinance, Estate Duty Ordinance, Inland Revenue Ordinance, and Betting Duty Ordinance. It also operates the statutory placements of the Estate Duty and Collector of Stamp Revenue Commissioner.
There are three main tax returns that are filed every year by a business in Hong Kong. The three Hong Kong Tax filing have been shared below in brief:
Profits Tax Return (PTR)
The IRD would issue the very first Profit Tax Return (PTR) of the company approximately after 18 months of incorporation. The subsequent Profit Tax Returns would be issued every 12 months after that. The company is obligated to fill and submit the Profits Tax Return. This Hong Kong Tax filing is given with a set of audited account to the IRD to figure out the amount of tax necessary to pay in respect of the basis period.
Usually, the first year auditing and accounting take a long time to complete. And as per the Hong Kong Company Ordinance, the annual financial statements of the company have to be audited by a Certified Public Accountant (CPA) for the submission. It is advised to arrange an accountant as soon as you initiate the business to have all the records.
Furthermore, the first Profits Tax Return has to be finished and submitted within three months from the issue date. So, it is important to let the accountant know that they need to consider whether an extension application is applicable as soon as the Profits Tax Return arrived. Just like the other laws and deadlines, late or non-submission will attract a heavy fine.
The audit and the accountancy fee depends entirely on:
- the scale of the business (number of transactions, amount of turnovers, etc.)
- the nature of the business (service, trading, manufacturing, etc.)
- the other factors that include the level of skills and responsibility, the estimated amount of time spent, etc.
Types of Profits Tax Returns
There are three profit tax return forms, and they are:
- Profits Tax Return – In Respect Of Non-Resident Persons (BIR54)
- Profits Tax Return – Persons Other Than Corporations (BIR52)
- Profits Tax Return – Corporations (BIR51)-For Hong Kong Limited Companies
Depending on the category that your business falls under, you can choose the form you need for the filing of taxes in Hong Kong.
This is the last return that must be filed every year as per the obligations of the IRD and the Companies Registry. During the first week of April, the IRD would issue the Employer’s Return to the company. Moreover, it is the director’s obligation to complete and submit the Employer’s Return back to the IRD within one month after receiving it.
This is a compulsory task which has to be completed even if the company has not hired an employee. And if the company doesn’t comply with this, they would attract fines and penalties, that is a part of the Hong Kong Tax filing.
Tax incentives, allowances, deductions and more!
Now that you are aware of the types of taxes involved in this, let us now understand all about the different allowances, incentives, and deductions that a company can obtain during the filing of taxes in Hong Kong.
In Hong Kong, there are no specific targeted incentive regimes for any overseas investors or the foreign-owned firms. Nonetheless, its substantial available capital, freedom from government interference, good infrastructure, low tax rates, and duty-free status make it appealing for potential investors. Hence, it becomes a very competitive region as compared to the other countries in the area. The integrity of the procedures for establishing, expanding and investing in a local company is a major attraction for any foreign investment in Hong Kong. Another major benefit is the double taxation relief.
Double Taxation Relief
Double taxation occurs when two or more tax authorities overlap. This means that the same item of profit or income is subjected to tax in each jurisdiction.
In Hong Kong, the territorial basis of taxation is adopted, where if the profits are coming to a business from Hong Kong, only then is the tax applied. Otherwise, the company can enjoy a tax-free income coming into the company from out of Hong Kong. Moreover, Hong Kong permits a deduction for any foreign tax that is paid on a turnover basis in respect of income that is also subjected to tax in Hong Kong.
Hong Kong also has double taxation treaties with other foreign countries. This means that Hong Kong companies can apply to waive any holding taxes when doing business in these countries. There may be other requirements or documentation for the company to apply for these. Be sure to advise a professional accountant when dealing with taxation in foreign jurisdictions and double taxation treaties.
A list from the IRD website is as: http://www.ird.gov.hk/eng/tax/dta_inc.htm
Even though you can easily enjoy no-profit tax placed on the income that comes from out of Hong Kong, this doesn’t mean that you cannot be taxed for the profit in that country from where the income is coming in.
This is not all. There are a few tax facilities are available while filing of taxes in Hong Kong where the government grants stimulated depreciation allowances on plant and machinery and many other deductions that would be explained about in details below.
As mentioned above, there are many deductions that you can claim from the Hong Kong government while you are filing the taxes in Hong Kong. These deductions would be the mandatory contributions made to the recognized occupational retirement scheme or a compulsory provident fund scheme. Also, the contributions other than the obligatory contributions are basically the voluntary contributions, and they cannot be taken as a deduction.
Moreover, the depreciation and other capital allowances can be considered as deductions on if they are essential to the production of your assessable income. Other than this, you can get deductions for the approved charitable donations while filling for taxes in Hong Kong. You can normally claim deductions for donations made to an approved charitable organizations only. The other deductions include the expenses for self-education and deductions for the home loan interest and the elderly residential care expenses for those who are living in Hong Kong.
Now that you know about the deductions that are needed, you would not need to attach any documents for the proof. But in case IRD wants to make sure the situation is as you say, it is good to keep documents ready to provide it to them for getting the deducted amount when filing for taxes in Hong Kong.
If you are charged salaries tax or have elected personal assessment, you are given a basic allowance that you can claim along with the other allowances that can reduce the total assessable income. This is only if the commanded requirements as specified in the Inland Revenue Ordinance are satisfied while filing your taxes in Hong Kong.
In every assessment year, you are offered a basic allowance. Although, you can still claim the other allowances in respect of the dependent family members:
- Child allowance
- Dependent brother or dependent sister allowance
- Dependent parent and dependent grandparent allowance
- Disabled dependent allowance
- Single parent allowance
- Married person’s allowance
You can check out the allowance schedule as set out by the IRD at: http://www.ird.gov.hk/eng/pdf/pam61e.pdf
These allowance can only be claimed when filing for the personal tax returns. Other than this, there is no need for any allowance in the other tax returns due to the very friendly tax regime in Hong Kong. So, you can easily open a company and have the Hong Kong tax filing completed without much stress for paying a lot of taxes, due to the low tax rates and no-tax fee on most things.
Filing Taxes in Hong Kong
Each and every company in Hong Kong are subjected to the Hong Kong tax filing requirements annually with the Companies Registry and the IRD. The requirements for the annual filing of taxes in Hong Kong of a private limited company are mentioned below:
Filing of Profits Tax Return with The Inland Revenue Department (IRD)
With the Inland Revenue Department, the company that has been formed in Hong Kong has to comply with the Hong Kong tax filing of the profits tax return every year. This would also include the audited accounts of the company that has to be submitted as well as on an annual basis to the IRD of Hong Kong. Moreover, it is normal for the IRD to issue the tax return filing notification for the company on the 1st of every year as a reminder for the filing of taxes in Hong Kong.
If a company has just been incorporated, they would receive the profits tax return after 18 months of the establishment. The company would set it’s financial year end when submitting its first PTR.The first financial year end is not fixed for the company, unlike other countries which follow the calendar year and fall on December 31st, and depends entirely on the date of incorporation for the company. Thus the company can choose a financial year end closer to the 18th month mark. Keep in mind though, as the fiscal year for the city of Hong Kong ends on March 31st, the PTR will be issued according to this fiscal year. For example, if the company was incorporated in September 2017, The IRD may issued the first PTR for the company for the 7 month period from September 2017 to March 2018. However if the company chooses a year end 16 months after incorporation, on December 31st 2018, then the company would file it’s first PTR as NIL, and its profits until December 31st 2018 on the next PTR. After this, the company’s financial year end would fall on every 31st of December after that, so December 31st 2019, December 31st 2020, and so on.
As soon as the companies get the tax return notification, they need to file it within one month of the date of the notification. The organizations can also request for the extension if required, but this still includes any penalty payment even if the date has been extended. Also, if you fail to submit the return before the due date, you can incur a penalty or prosecution as well.
While you are filing the tax return with the IRD, it is important to attach the following documents for the support in proving your claims:
- A tax calculation that shows how the amount of the assessable profits (or the adjusted losses) has been arrived at.
- The profit & loss statement, auditor’s report and balance sheet of the company relating to the basis period.
When, where and how to file taxes?
The standard filing time for the profit tax return is within one month from the date of issue. To know about the compliance date of the submission, read the first page of the notification from the IRD for the profits tax return.
Certified Public Accountant (CPA)
When you hire a CPA to audit the financial statements of your company, this service should also include the taxation computation schedule and tax filing for the company. They would take care of filling out the profits tax return and also file this (hopefully in a timely fashion) to the IRD. Be sure to ask the CPA for the stamped letter from the IRD, to make sure that the CPA has actually filed the return, and this was received by the IRD.
Further Extension for using Electronic Filing
Since the IRD is promoting the electronic filing of taxes in Hong Kong, you can easily benefit from requesting an extension of two weeks after the regular due date. However, this is subjected to a condition that the Small Partnership Businesses and the Small Corporations would file the profits tax returns.
At the start of every year, the IRD advertises a Circular Letter to the tax representatives on the IRD website. You can find this under the menu of the “Tax Information – Individuals/Businesses” and in the “Tax Representatives’ Corner.” It basically sets out the details of the block extension scheme lodgement arrangements (which is another due date extension program) per year and how the block extension can be applied for the Hong Kong tax filing in that year.
Application for Extension for the Submission of Return
Yes, you read it right. There is a chance where you can easily ask for an extension to the extension that you already received for the Hong Kong tax filing. There is a general rule under the Block Extension Scheme, where the further extension of time beyond the already extended due dates can be granted once and only in the most exceptional circumstances.
Moreover, if there is a case where you might need to request for such an extension, you would need to give it in writing along with an explanation of why the lodgement cannot be made in the extended time already. And with this written part, you would also have to provide the IRD with solid proof, in terms of supporting documents and evidence. Though there are cases when the extension is granted, you should not assume that you can be granted a further extension for the filing of taxes in Hong Kong.
What if I’m late on my payments?
In case you have missed out the filing of taxes in Hong Kong, there may be consequences that you would have to face. The IRD would eventually take punitive actions for the failure of the Hong Kong tax filing by the due date provided to you. The actions that can be taken are (keep them in mind and avoid filing late since it is often illegal in every nation of the world):
Upon the late tax filings for the company, the IRD may first issue a fine for the company, and request the company to submit the accounts. If the accounts are not submitted and any fines not dealt with, the company may incur further penalties, as described further.
The IRD commission might prosecute the taxpayer if they have failed for the filing of taxes in Hong Kong by the due date without any reasonable excuse for it. Moreover, the court may also impose a penalty fine of up to HKD 10,000 along with a fine of three times the tax that has been undercharged.
The Commissioner of the IRD, also known as the CIR might compound the offense and place of prosecution or assess an additional tax as a penalty that is not exceeding 3-times the amount of the tax that has been undercharged. Also, the CIR might not elect to prosecute the taxpayer only under the circumstances where the taxpayer readily submits the finished tax return and even agrees to the compound offer, within a particular time limit.
In case the taxpayer has failed for the Hong Kong tax filing by the due date, the CIR has the power to take a penal action for the late filing of taxes in Hong Kong. The taxpayer would be imposed with a penalty by the CIR in the form of an additional tax. The maximum amount of the penalty for additional tax is three times the total amount of the tax that has been undercharged. This is also applicable only when the CIR finds and considers that the taxpayer has failed to file the taxes within the due date and does not have any reasonable excuse.
And if this has been issued to the taxpayer, as per the rules, the taxpayer has the rights to make a written representation within the time specified by the IRD in which the person has to explain the reasons for the late filing of taxes in Hong Kong. This would urge the CIR to consider the excuse and decide if the additional tax assessment imposition should be removed or not.
In this case, the CIR might estimate the assessable profits and raise the charges as per it. In case the taxpayer wishes to object to anything, it has to be lodged within one month after the date of issue for the estimated charges. Along with this, it also has to be followed by a completed profits tax return.
Otherwise, the estimated charges would be taken as the final and the definitive one, and the tax imposed for the late filing of taxes will become payable. And that is not all; the worse comes when the CIR might also end up raising the additional assessed charged if there hasn’t been any valid objection that was filed for the estimated assessment by the taxpayer.
Hence, it is advised that all the taxes must be paid right when you get the notification. This is so that you are not liable to any extra charges or penalties that would come after it.
Do not get scared of all the penalties. They are just like a security system for those who take the tax system lightly in a country. But this does not mean that you should not bother in completing the Hong Kong tax filing on time.
All-in-all, Hong Kong has a well-regulated yet simple tax system that is very straightforward, as you have read above. Other than this, you can easily enjoy the low income tax rates as well. It is due to these benefits that the competitiveness of Hong Kong has increased in that region, and it remains an attractive relocation target for many of the professionals around the world.
So if you are planning to incorporate a company in Hong Kong, you have got a lot of benefits to obtain. These benefits, as mentioned above and in the previous guides, come in everything as well as the Hong Kong tax filing that many other countries do not offer when it comes to foreign investment. Our advice – take this chance and make the best out of it in Hong Kong!
And if you need a great agency to help you with all the filing of taxes in Hong Kong to be completed on time and perfectly well, Startupr is the right choice for you. The services at Startupr are not just limited to the incorporation of the company. Startupr also provides great business handling and consultation services including Hong Kong tax filing. If you want to be sure that your tax is done properly, take the advice and hire Startupr.