Filling Profits Tax of HK Limited Company
Each Hong Kong company will need to file the Profits Tax Return for each year.
Accounting and tax collections are important in every country, and this is no exception in Hong Kong. Each Hong Kong company will need to file the Profits Tax Return (PTR) for each respective year when conducting business, and this is issued by the Hong Kong Inland Revenue Department (IRD).
The company would need to organize the company accounts, and prepare them to be submitted to a Certified Public Accountant to be audited and filed to the government. After the accounts have been prepared and audited, the audit report and taxation computation will be submitted with the PTR to the Inland Revenue Department.
Hong Kong’s Tax Year
The tax year in Hong Kong follows the fiscal year starting in April, and not the calendar year from January to December. As the fiscal year of Hong Kong ends on March 31st, the PTRs also follow this same model. Therefore the 2017 (2016/17) PTR will be for the period from April 1st, 2016 until March 31st 2017.
For companies in Hong Kong, you can select which financial year end is best for you, and this would then fall under a certain fiscal year end according to that of Hong Kong. Therefore If your company’s year end is on December 31st, 2016, then these financial figures will be used to fill in the 2017 PTR for the company. Any profits from the time period from January 2017 to March 2017 will be counted for the 2018 PTR, as even though it occurs within the fiscal year of the Hong Kong government, it falls within the next year of your company’s fiscal year (ie. December 31st, 2017).
Normally a company will have only one month to file and complete this PTR form, before the IRD issues any penalties for the late filing of this tax form. In the case of the first PTR for the company, the company can extend this filing for up to 3 months from issuance date. This PTR filing can be extended for certain year end dates, but needs to be applied for each year for a filing extension.
The dates for the extension of filing are as below:
Financial Year end as at 31st of March
- Tax Filing Date – 15th of November
- Documents Ready for Audit – Not later than 1st of September
Financial Year end as at 31st of December
- Tax Filing Date – 15th of August
- Documents Ready for Audit – Not later than 1st of June
Financial Year end as at Other dates than a) or b) e.g. 30th of June
- Tax Filing Date – 30th April
- Documents Ready for Audit – Not later than mid of February
1st tax filing request
The first PTR for the company will usually be issued around 18 months after the incorporation date of the company. For instance, if a company was incorporated on 01 January 2017, it will receive it’s first PTR from the government around June 2018.
During this time, if the company has commenced business either in Hong Kong or abroad, it will need to prepare the accounts for the company. Even if the company has conducted it’s business outside of Hong Kong, it would still need to report it’s accounts and any profits earned to the IRD in the annual reports, in order to claim the profits tax exemption.
It will need to complete the PTR if the company had a profit or loss for the period. The company will then need to submit the completed PTR together with the supporting documents within three months from the date of issuance. A certified public accountant can assist you with preparing the audited financial statements and completing the PTR for the company.
NIL RETURN VS. PROFITS TAX EXEMPTION
The effective operation of the simple tax system with low tax rates in Hong Kong requires a high degree of compliance and understanding by taxpayers and businesses. It is also the responsibility of each and every taxpayer under the law to file accurate and timely tax return to the Hong Kong Inland Revenue Department (IRD).
It’s often misunderstood that a “NIL” PTR return are filed for businesses that have not carried out business activities in Hong Kong. This notion is wrong, and it could lead to further tax implications, heavy tax penalties and possible court summons for businesses down the road. Companies should file a “NIL” PTR that have not commenced any business transactions throughout the period, whereas the commencement of business is when the company starts its business activities.
Companies can benefit from the Hong Kong’s territorial tax system, whereas tax is only levied on profits derived in Hong Kong and zero taxable income for profits outside of Hong Kong, but they first must apply for the profits tax exemption and be granted offshore company status. Offshore status is not automatically granted, and companies should never assume that this will be granted when filing a “Nil” PTR.
The Inland Revenue Ordinance (IRD) states that punitive actions can be taken against a person under section 80(2) of Part XIV, who without a reasonable excuse:
- makes an incorrect return;
- makes an incorrect statement;
- gives any incorrect information;
- fails to furnish a return in time; or
- fails to inform chargeability to tax.
The offence is subject to a fine of $10,000 and triple the amount of the undercharged tax.
Startupr can offer our professional advice on these filings, as we have experience in properly handling “Nil” PTR returns and offshore status for profits tax exemption cases. In the case your company has improperly filed a “Nil” PTR when it has conducted business activities outside of Hong Kong, Startupr can assist in getting your company back on track with the correct tax return filings.
“NIL” Profits Tax Return
Companies that have not commenced any business transactions throughout the period, a “NIL” Profits Tax Return may be filed. The commencement of business is when the company starts its business activities. The exact day of business commencement is not easy to determine, however in general it would be when a business undergoes activities in relation to the business.
If the company has not commenced business of any kind, then it may file a “NIL” PTR as declaring no business activity yet for the company. Filing the PTR form as “NIL” in effect states that the company has not conducted business, neither in Hong Kong nor anywhere else for the company.
In the case the company has commenced business and conducted it’s activities solely outside of Hong Kong, it may apply for the Offshore Profits Tax exemption. This is different from the “NIL” PTR as the company states it has conducted business with the financial figures filed in the PTR, however applies for these to be exempt from profits tax under the Hong Kong regulations. The application for the profits tax exemption is made at the same time with the submission of the Audit Report and PTR.
This is an important step in recognizing the company’s business activities as exempt from Hong Kong profits tax for the company.
Note: In case the tax return for a HK business has not been filed to the IRD by the deadline, it is taken as an offense that is subject to government penalties.
Profits Tax Exemption
In case a HK business is running entirely from outside the country, it is qualified for the Profits Tax Exemption that the authorities of the Hong Kong tax office grants.
This means that there is a 0% rate of Income tax that would be applied to the income of the company that is coming in from the outside of the country, permitting the company enjoys a tax-free profit.
You can enjoy this only if the Profits Tax Exemption claim has been approved. These are the things you would need to do for it:
- Submit the PTR & audited financial statements.
- File an offshore exemption claim with the audited financial statements.
- The IRD will issue an offshore claim inquiry letter for the firm as proof.
- The company’s directors and/or sales representatives have to provide their passports to the IRD along with the sales representatives, company invoices, contracts, arrangements, shipping documents, etc.
- After the verification has been done, you would be issued the offshore tax exemption by the IRD.
Note: The Offshore tax exemption is valid for maximum five years for the offshore profits only.
Offshore income of a company is not taxable in Hong Kong?
Hong Kong institutes the territorial system for corporate tax arising in or derived from Hong Kong. What this means is that corporate tax will only be applied to profits from trade, business or profession within the Hong Kong territory. Profits from business activities that occur outside of Hong Kong will not be subject to corporate taxation, regardless if the funds are remitted through Hong Kong or other territories. Therefore, a company with funds received to a Hong Kong bank account but conducting trade outside of Hong Kong may not be subject to corporate profits tax. On the other hand, a company with funds received to an offshore bank account but with trade within Hong Kong may be subject to corporate profits tax.
This territorial system also does not depend on if you are a resident or non-resident. You may be a resident with non-taxable profits deriving outside of Hong Kong or a non-resident with taxable profits in Hong Kong. This system is mainly determined if the profits for the company were arising in or from Hong Kong.
The questions of whether a company conducts business in Hong Kong, and whether profits are derived from Hong Kong are largely of fact. Some guidance on the principles applied can be found in cases which have been considered by the Hong Kong courts and other law cases.
Profits Tax Return Information
Here are some other general information for the profits tax return:
- Your company will need to file the Profits Tax Return once per year, as issued by the IRD.
- The first PTR will be issued around 18 months after incorporation, and will cover the first 18 months of the company.
- Each subsequent PTR for the company will cover 12 months and should be filed annually.
- The PTR should be accompanied with supporting documents, such as a certified audit report and tax computation.
Hong Kong Inland Revenue Ordinance and Hong Kong Companies Ordinance
There are some general information about Hong Kong Inland Revenue Ordinance and Hong Kong Companies Ordinance.
What is Hong Kong Inland Revenue Ordinance (Cap.112)?
Hong Kong’s Inland Revenue Ordinance is one of Hong Kong’s ordinances that regulate the inland revenue of Hong Kong. This ordinance is stated briefly in the IRO section14. In this section, the government is responsible for collecting the tax and duties directly.
The IRD is answerable for the organization of the accompanying Hong Kong ordinances on taxes and duties and the connected principles and guidelines:
- Business Registration Ordinance Cap.310
- Hotel Accommodation Tax Ordinance Cap.348
- Stamp Duty Ordinance Cap.117
- Tax Reserve Certificates Ordinance Cap.289
- Inland Revenue Ordinance Cap.112
- Estate Duty Ordinance Cap.111
- Betting Duty Ordinance Cap.108
What is Hong Kong Companies Ordinance (Cap.622)?
On 3 March 2014, an entirely new Hong Kong Companies Ordinance came into effect in Hong Kong. The new Companies Ordinance is a comprehensive rewrite of the predecessor Companies Ordinance to improve Hong Kong’s company law and further improve Hong Kong’s status as a significant international business financial center.
Five rounds of public meetings and endless discussions were conducted during a series of public forums and seminars over the years; the Companies Bill was finalized and introduced into the Legislative Council “LegCo” on 26 January 2011. In February 2011, a Bills Committee to examine the Bill was composed. After studying over 200 papers or submissions that are available on the Legislative Council website and 44 meetings lasting over 120 hours, the Bills Committee completed its scrutiny of the Bill in June 2012. On 12 July 2012, the Companies Bill was passed by LegCo.
The account and audit section consists of the accounting and auditing provisions concerning the keeping of accounting records, the preparation and distribution of annual financial statements, auditor’s, director’s reports, and auditors’ appointments and rights. New terms are introduced to facilitate SMEs to take advantage of accounting and reporting requirements, requiring public and massive companies to introduce an analytical business review in directors’ reports and improve auditors’ right to information. This section also includes new sanctions relating to the contents of auditor’s reports.
In terms of Reporting Exemption, the new Companies Ordinance relaxes the criteria for companies to prepare simplified financial reports and directors’ reports (i.e. the “reporting exemption”). Private or guarantee companies (other than certain companies specifically excluded) that are qualified for the reporting exemption are exempted from certain specific requirements relating to the preparation of financial statements, directors’ and auditor’s reports. The accounting standards applicable to companies falling within the reporting exemption are less complicated than the standards applicable to listed, public or other companies not qualified for simplified reporting. However, audit of the financial statements is still required for all companies, except dormant companies (section 447), under the new CO.
Differences between Hong Kong Inland Revenue Ordinance and the Companies Ordinance
Under Hong Kong Inland Revenue Ordinance, in case the company does not have a business or is at a loss, they don’t have to submit the audited accounts for tax filing. Nevertheless, if there is receipt of profits tax returns from time to time, it is mandatory to compile the tax. Under Hong Kong Companies Ordinance, audited statements are needed to be done annually.
Managing the records of the accounting and compiling the annual audited report and financial statements are legally required under Accounts and Audit of the Hong Kong Companies Ordinance (Cap. 622) for a company incorporated in Hong Kong. It refers to all the firms incorporated in Hong Kong, whether they are starting a company in Hong Kong or abroad.
In order to keep the business running smoothly, it is essential to maintain the company records. One must maintain the records of accounting and compile the annual audit accounts. Even though in certain situations, IRD won’t require these records, keeping the accounting records will be beneficial for you. Accurate business accounting laws will help you in preparing financial statements accurately and quickly. Therefore, enable the cash flow in your business and run it smoothly with all the documents handy.
Some Points to Keep in Mind
The first financial period of the business will normally begin from the incorporation date until up to 18 months from incorporation. The company should also select a financial year end. For instance, if the company selects a year end on March 31st, every subsequent year after the first day of the new year will be on April 1st and ending on the proceeding March 31st. All financial statements will have to be prepared during this financial year time.
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