Sole Proprietors and Freelancers Taxation in Hong Kong – Guide

If you are earning money, you must pay taxes, and there is no way you can avoid it. It is essential to pay taxes in order to build the nation. Unlike other employees, self-employed individuals should not let their taxes be automatically deducted from what they earn. Therefore, if you are a freelancer or self-employed, it is mandatory that you pay tax.  There can be a number of issues you have to deal with when you are a freelancer or solely employed. Being a business person does not exempt you from paying taxes in Hong Kong; you should learn how to deal with such issues promptly.  This article will give you an insight into self-employed tax filing in Hong Kong. Keep on reading and learn more about it.

Sole Proprietors and Freelancers Taxation in Hong Kong

Self Employed and Freelancers in Hong Kong 

Individuals who want to start their own business can be self-employed if they choose to work as a sole proprietor or partner in a partnership. Many investors in Hong Kong often choose the sole proprietor who wants to start their own business. Let us study more about this. 

Who are self-employed or freelancers in Hong Kong? 

A freelancer in Hong Kong is one who works for themself rather than for a business. Freelancers take on contract work for companies but do not work as their employees. 

They may see themselves as casual employees working with various employers without dedicating their entire time with the company. Freelancers’ income is derived from providing professional or personal services in Hong Kong and so there is no relationship between boss and employee. They are thus considered as carrying out a business on a need to basis and are as such self-employed persons.

Thus, a self-employed person may be called a sole proprietor or a partner of a business. As a self-employed person, you are liable to profits tax on the assessable profits of your sole proprietorship or partnership business. People who are paying self-employed tax in Hong Kong choose to work as sole proprietors and need to follow the primary record and accounting principles. These can be summarized as follows:

  • maintain the business records for at least seven years;
  • prepare the accounts based on the existing accounting records;
  • fill in and file the tax return (report the business profits and losses).

One can change the sole proprietorship into a partnership in Hong Kong or vice versa in case the investors decide that this is the most suitable option for their business.

Tax Obligations of Self Employed people in Hong Kong 

The sole proprietorship Hong Kong Tax regime follows a different kind of taxation principle. Sole proprietorship in Hong Kong has a tax regime wherein you need to fill in a particular tax return form and declare your gross income. The profits tax is payable at the regular rate in Hong Kong for the assessable profits. Sole proprietors may claim expenses and deductions.

The conventional corporate income tax rate in Hong Kong is 16.5%, and a lower rate of 15% applies to unincorporated businesses. Hong Kong has a territorial taxation system, which means that only the income derived from the city is subject to the profits tax.

As a self-employed person, you are responsible for profits tax on the assessable profits of your sole proprietorship or partnership business. Therefore, you need to:

  • maintain sufficient business records for at least seven years;
  • develop accounts for your accounting records;
  • achieve and submit a tax return for publishing business profits or losses;
  • inform the Inland Revenue Department in writing about your liability to tax, not later than four months after the end of the basis period for the year of assessment concerned, except you have previously accepted the tax return from the Department;
  • notify the Inland Revenue Department about the ending of your business within one month of cessation;
  • inform the Inland Revenue Department about your change of address within one month of the change; and
  • Pay the tax.

Calculate Net Income 

Tax planning for those who are self-employed and starts with understanding the way you are being taxed. The law distinguishes freelance professionals from independent contractors. Furthermore, when you are self-employed, your tax is based on net income– gross receipts minus tax-deductible of business expenses. The net amount is calculated when you are taxed twice, one for regular income tax and the other for being self-employed.

One can compute the net income by developing the necessary schedules and forms. It is about the profit or loss that comes from the business, and you should submit this using a tax return. As a sole proprietor, you have not completed the legal steps needed to set up your business in other forms such as a corporation.

It would be best if you calculated your income, more specifically, your net income. Net income is the assessable income after deductions and allowances as a freelance professional. Your employment in the world of self-employment may be trailblazing, but you have been deemed an independent contractor in the eyes of the IRD. This means that you pay a flat rate of 7.5% on the first HK$2million earned and 15% on your remaining profits. 

Sole Proprietorship and Partnership Business 

There are various kinds of business structures one settles into, such as partnership business and sole proprietorship. Despite the design or business model you agree to, you will still be liable for profits tax on the profits you make. Taxation for both sole proprietors and partnership businesses in Hong Kong are discussed below; keep reading to know more. 

Taxation for sole proprietors in Hong Kong 

Someone who is self-employed or functioning as a freelancer in Hong Kong applies to any individual whose profession, trade, or business earns them an income through:

  • Producing professional services and  personal services
  • Buying goods
  • Selling goods

To draw a clearer picture of those definitions when it comes to the formal business structure, a self-employed person or freelance could be operating as:

In case you are operating as a sole-proprietorship business, the salary you pay yourself shall not be reported under Part 4 (Salaries Tax) of the BIR60 form. Still, it would be under business profits -Item 7 (Assessable Profit) in Part 5 (Profits Tax) of the form.

The main thing to plan for when you are going to pay taxes in Hong Kong is to keep your prices in check. It would assist if you did not wait until the last minute to add everything you spent on it. It would help if you used accounting software to track your spending and earnings quickly.

Taxation for partnership business in Hong Kong 

Hong Kong taxation of a partnership registered is performed on its worldwide profits. The offshore profits and the profits derived from the sale of capital assets are not included. The applicable rate of the corporate income tax in Hong Kong is 16.5%. The profits distributed to the partners are not taxable under the corporate taxation regime. However, they are considered personal income and taxed accordingly. 

In a partnership business, the taxation of a business is divided between the existing partners. This is to ensure that each one is taxed with respect to their share of the profit and losses. Therefore, the share is equal to the percentage of contributions made to the partnership’s capital. Each partner submits self-assessment tax returns.

A Profits Tax Return (BIR52) is issued for partnerships in Hong Kong. When a sole proprietorship in Hong Kong is converted into a partnership, one should notify the change to the Business Registration Office, and the profits tax return will be adjusted accordingly.

One of our company formation agents in Hong Kong can help you with more information on changing business structures and the requirements for annual reporting.

When to change your Sole proprietorship into a Limited Company

A sole proprietorship and a limited company are entirely different business structures. It is not possible to convert from one form to another. The only solution is to form a wholly new and separate limited liability company (LLC) in Hong Kong.

Once a business owner chooses to move to a limited liability company, they may cease their sole proprietorship. They may then incorporate a new Hong Kong limited liability company by applying for a new BRC

The newly combined company will not have any connections to previous transactions, assets, or liabilities under the sole proprietorship. It must be noted by the company owners that there is a distinct separation between their personal and business finances. Company owners cannot use their accounts for the new company and open a new corporate bank account.

Need Any Assistance in Tax Filing for Your Hong Kong Business? 

Now that you know all about the tax filing for your Hong Kong business, it is important that you file all the taxes properly. It is important that you hire a professional rather than make any kind of mistake. Feel free to contact the Startupr if you face any complications.