Profit Tax of Hong Kong Company
Hong Kong is highly sought after for businesses for it’s simple taxation structure and lower taxation fees.
Hong Kong is highly sought after for businesses for it’s simple taxation structure and lower taxation fees. These simplified tax regulations and straight forward taxation establishes Hong Kong as a booming business and investment center not only in Asia, but around the world.
In addition to this, businesses can enjoy tax incentives and allowances to further reduce their tax liabilities for their business activities while in Hong Kong and abroad. This translates into less tax burdens on your company and greater economic freedom when doing business. Also, Hong Kong companies can claim tax exemption status if they conduct their business outside of Hong Kong, and if none of their business activities arise from or are derived in Hong Kong.
This is essential for startups and companies when conducting business internationally. The most defining aspects of Hong Kong taxation is it’s flat corporate taxation rate and the territorial corporate tax system.
Hong Kong Governing Body
The corporate profits tax in Hong Kong is levied by the Inland Revenue Department, or IRD, for short. This governing body deals with all the taxation issues in Hong Kong both for businesses as well as individual tax. Companies would need to submit the Profits Tax Return (PTR) and Audited Accounts annually to this department, which will be reviewed and any taxes assessed for the company.
The Scope of the Charge
The scope of Hong Kong taxation establishes the territorial concept for Hong Kong companies, which outlines that taxation only from profits arising in or derived from Hong Kong. The taxation rules in Hong Kong applies to all people and entities which have profits arising in or derived from Hong Kong, no matter if they are a resident or non-resident of Hong Kong. Further, this is regardless if funds are remitted into/out of Hong Kong or other territories, it will only apply to the profits in Hong Kong.
This applies to the business activities which is attributable to chargeable profits occurring in the Hong Kong territory, as defined by the Hong Kong taxation regulations. This definition of chargeable profits arising in Hong Kong is largely of fact, and some guidelines can be found in cases from the Hong Kong Government.
Flat Corporate Tax Rate
There is a flat corporate tax rate of 16.5% of assessable profits in Hong Kong. This tax rate is among the lowest in the world for businesses, which is the reason why Hong Kong is an attractive jurisdiction for incorporating businesses. After chargeable profits are made, possible taxation may be further reduced by various tax deductions and allowances for businesses, as set out by the Inland Revenue Department(IRD).
Currently the Hong Kong government is under legislation to further reduce this corporate tax rate for small businesses in the future, outlining a tax plan to reduce this to below 10% in the coming years.
Territorial Corporate Tax System
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. 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.
The questions of whether a company conducts business in Hong Kong, and whether profits are derived from Hong Kong are largely of fact. Documentary evidence and supporting documents will need to be kept showing where the business activities and profits occurred for the company. Some guidance on the principles applied can be found in cases which have been considered by the Hong Kong courts and other law cases.
The basis period is assessed in regards to the Year of Assessment in Hong Kong. The year of assessment in Hong Kong ends on March 31st. Thus the fiscal year is from April 1st until March 31st. Therefore, the year of assessments for 2016/17 would be for the fiscal year ended 31 March 2017.
Hong Kong companies can select any year financial year end date for the company. Normally most companies will choose their financial year end date on December 31st or March 31st, as these financial year ends may enjoy tax filing extensions from the IRD. However Hong Kong companies can choose any financial year end they desire.
Corporate Tax Filing Requirements and Deadlines
Normally, the Inland Revenue Department (IRD) will issue the Profits Tax Return (PTR) for companies in April of each year. The reason for this is the fiscal year in Hong Kong is from April 1st to the March 31st of the preceding year. A company would have one month to file the accounts after the PTR is issued from the IRD. The company can elect to extend their PTR filings up to 9 months after their financial year end, normally after their first PTR filing once their financial year end is set up.
For new companies, the HK Inland Revenue Department issues the first Profit Tax Return to a company 18 months after incorporation. The completed PTR must then be submitted within three months from the date of its issuance. If the PTR is submitted late for the company, the IRD may issue a late penalty fee or in stricter penalties for non-compliance of PTR filings.
This PTR will establish your company’s first fiscal year end-date. For example, if your first companies accounts is from October 31st, 2015(date of incorporation) up until 31 March 2017, then the financial year end for the company will be March 31st for each preceding year.
After this all subsequent PTRs must be completed and filed for the company, no later than one month from the issuance date of each year’s PTR.
Documents submitted to the IRD
The company must file the annual set of returns with the following documents:
- The completed Profits Tax Return (PTR) as issued by the IRD
- A certified copy of your statement of Balance sheet, Auditor’s report, and the Statement of Profit and Loss in respect of the basis period
- A tax computation showing how the amount of assessable profits(or adjusted loss) has been arrived at
These documents are normally prepared by a Certified Public Accountant, who reviews the company accounts and generates an audit report and tax computation for the company. They would act as the tax representative, and be responsible for completing the PTR and tax calculations for the company on their assessable profits.
Provisional Profits Tax
The provisional profits tax in Hong Kong is the assessable profits for the next year of assessment for a company. This figures is only arrived at after the current year’s tax payable is calculated, and paid in advance together with the current years taxes, essentially doubling the amount of taxes owed in the current year. This estimated tax figures are paid in two installments to the IRD, the first being 75% of the taxes payable and the second being 25%. This prepaid provisional tax would then be used next year to offset the taxes payables next year for the company, which would then make a prepayment of the year after next’s taxes payable for the company.
For example, if a company’s assessable profits is HKD 200,000 for the year 2017, without any deductions or allowances for simplicity, they would need to pay 16.5% or HKD 33,000 in taxes for the year 2017. After this is calculated and reviewed, the company would also need to pay the provisional tax for the year 2018 as a form of advanced payment, of HKD 33,000 as well. Therefore the company would need to pay HKD 66,000 in 2017, HKD 33,000 as taxes and HKD 33,000 as taxes in advance for 2018. This HKD 66,000 would need to be paid in two installments, the first being HKD 49,500 (75% of total payment) and the second being HKD 16,500 (25% of total payment).
Tax Treatment for Net Loss
If a company has a net loss for the year, they can carry forward this loss to be offset against future assessable profits, and taxes payable in the future. This however does not apply to the same corporate group, whereas companies cannot transfer their losses between each other in the same group. Also, losses cannot be applied backward for assessable profits made in previous years.
Net Income Vs Assessable Profits
A company’s net income during the period may differ from it’s assessable profits to be taxed, depending on the certain deductions and allowances able to be granted to a company. This would depend on the business nature, and the adjustments made to it’s net income when arriving at the assessable profits. In the cases where the company mainly conducts it’s business outside of Hong Kong, the net income may not result in any assessable profits for the company, if the company’s meets the requirements and successfully applies for the profits tax exemption.
Startupr can provide you assistance in any accounting or taxation matters you may have in regards to your company, or future business transactions in Hong Kong. We provide professional bookkeeping and taxation services, and consultation for your business needs in regards to the profits tax of Hong Kong companies.