Profits Tax Basics for 2024: Learn how to calculate it for your Hong Kong business
With its favourable corporate tax rates, Hong Kong is an attractive city for business ventures. What makes it stand out from other locations is that the process of filing a tax return is simpler than in many other places, including other Asian hubs such as Singapore.
If your business is in Hong Kong or you plan to relocate, you are likely wondering about the types of taxes businesses are subject to, the capital gains tax rate, and how to estimate your tax obligations. Let's delve into these topics to gain a comprehensive understanding. Additionally, we’ll discuss best practices when to be fully prepared for your tax return.
First, let’s look at the types of tax payable in Hong Kong
(and common taxes that are not required)
Profits Tax or Corporate tax: This is payable on net assessable profits of a business
Withholding tax: is very limited in scope, it only applies to payments of royalties and payments to non-resident entertainers. There is no withholding tax on dividends and interest payments
No capital gains tax
No GST/ VAT
No withholding of salaries tax from employees’ salaries
Profits tax is not applicable to profits gained outside Hong Kong.
Generally no tax on dividends
What is the Profits Tax rate?
Hong Kong has a Two-tiered Profits Tax Rates Regime. It taxes limited companies on profits below HK$ 2 Million at a rate of 8.25%, and remaining profits above HK$ 2 Million are taxed at 16.5%.
Simplifying further, only income that is “revenue” in nature is taxable. Capital gains are not taxable.
Here are some examples of how this works.
“Revenue in nature”: if you are in the business of making and selling t-shirts, income from sales is revenue in nature and taxable
“Capital in nature”: if you are in the business of making and selling t-shirts, you may occasionally buy a new t-shirt printing machine and sell the old one. Proceeds from selling the old machine are not taxable.
How is Profits Tax calculated?
To estimate the tax you will pay on your profits, you’ll need to calculate your taxable income by preparing a Profits Tax Computation. Here is how:
→ Ascertain your Net Income Per Account. This is your starting point.
+ ADD Non-Deductible Expenses and Capital Losses
- DEDUCT Non-Taxable Income
- DEDUCT Tax Deductions
= Assessable Profits/ Adjusted Loss
- DEDUCT Loss brought forward from prior years
= Net Assessable Profits
How are these terms defined?
Net income per account: These are also known as ‘net income per Audited Profit & Loss.’
Non-deductible expenses: In Hong Kong, this includes government fines, accounting depreciation, and other expenses not recognised under tax law
Capital losses: Capital Gains are not taxable. Therefore, capital losses are also not tax deductible.
Non-taxable income: For example, offshore profits or bank interest income
Tax deductions: Specific deductions allowed under tax law, for example, tax depreciation
Loss brought forward: If the company had a tax loss in prior years, this could be brought forward until it has been “used up” by future profits
To get the tax estimate, apply the Two-Tier tax system to your Net Assessable Profits. It pays, however, to note that this is a simplified calculation, and each business has its own intricacies. A qualified Tax Advisor such as Shepherd Asia can prepare this estimate for you.
Do we need to pay tax if profits were generated outside of Hong Kong?
What does it mean to be “offshore” for profits tax purposes?
Hong Kong has a “territorial tax system”. This means only profits derived in Hong Kong are taxable here.
Having said that, don’t assume your business qualifies as “offshore” just because you never travel to HK and don’t have customers here. The IRD sets specific requirements in tax law that determine whether profits are “onshore” or “offshore”. We recommend reaching out to us when incorporating your company in Hong Kong to ensure the proper documentation is complete.
In a recent development, some income previously deemed offshore (and thus non-taxable) will now be taxable in HK. This is due to pressure from the European Union and applies to passive income such as dividends, interest, capital gain, and IP income. Contact us for more details.
What is the Procedure for Profits Tax Returns?
Annual Profits Tax Returns are typically issued by the Inland Revenue Department (IRD) on 01 April each year and sent to the registered business address or third-party corporate secretary. They have to be filed within one month, though extensions can be applied for and are often granted based on the company’s financial year-end.
When working with a tax advisor, your tax filing deadlines depend on the financial year end of the company, Contact us for assistance with this.
If you are liable to pay taxes in Hong Kong, you are required to notify the tax authority in writing within four months after the tax year ends to ensure you receive the annual Profits Tax return.
If you have been receiving your Profits Tax return regularly and can expect it in the current period, you do not need to notify the authorities. However, if you have been told that you will no longer be receiving your Profits Tax, if it is your first time paying taxes in Hong Kong, or if you do not receive the return, you must inform the tax authority in time.
Documentation Requirements
When filing your tax return, you are required to submit supporting schedules and explanations for certain items, such as your expenses, fees, write-offs, donations, and other similar items. The list also includes offshore profits and other related expenses.
What are Provisional Tax and Final Tax?
When filing the first tax return, you will pay the “final tax” for the tax year that has passed and the “provisional tax” for the current tax year.
Provisional tax assumes the company has the same amount of taxable income in the current year as in the previous year. After the current year has passed, the amount of final tax payable will be compared with the provisional tax already paid. If there is an overpayment, it will be applied to next year’s provisional tax, with any additional excess refunded.
When are the tax payment and Tax Return deadlines?
For most companies, Notices of Assessment are usually sent out in September each year. They tell each company how much tax is payable.
The payment deadlines are usually in November and January. In November, 75% of the total (final + provisional) is due, and the balance is due in January.
Companies can apply for instalment plans or a “holdover” of provisional tax (i.e. no provisional tax must be paid) if they meet certain criteria outlined by the IRD.
As for the profits tax return deadlines, they depend on the type you are filing:
N Code Returns: 2 May 2024
D Code Returns: 15 August 2024
M Code Returns: 15 November 2024
M Code Returns & Current Year Loss Cases: 31 January 2025
Note: When filing electronically, each deadline is extended by one month except for the last one on our list.
For individual tax returns, the issue of tax returns falls on 2 May 2024. If you don't have a sole-proprietorship business, your tax return deadline is 3 June 2024, and if you have a sole-proprietorship business, the deadline is 2 August 2024.
If you opt to work with a tax representative—such as Shepherd Asia—you can extend your deadline.
In that instance, individuals without a sole-proprietorship business can file their profits tax return by 3 July 2024, and those that have a sole-proprietorship business can file them by 2 October 2024.
New Items in Profits Tax Returns introduced in 2024
To reflect recent changes in tax laws, several new items have been introduced to the Profits Tax returns. Most of them are in relation to family-owned businesses, though some items are relevant to foreign sourced income (sections BIR51 and BIR52). Learn more by reading our article about the 2024 tax reforms (FSIE And TCES).
Best practices around submitting your tax returns:
Set up accounting practices early on in your business.
After incorporation, the first tax return won’t be sent out until 18 months after incorporation. If you don’t keep up with the accounting, it’s a lot to catch up on!Be consistent throughout the year with your accounting.
The most common reason for missing the tax filing deadline is leaving the accounting to be done at the last minute. By keeping track of your accounts regularly, you will not have to endure the stress associated with deadlines.File your tax return within a month of an “Estimated Assessment”.
If a company fails to submit a tax return, the IRD can make an educated guess on what the tax payable may be and issue an “Estimated Assessment”. If you don’t respond with a properly filed tax return within a month, the assessment becomes final. If the business actually made less money, you don’t get a refund, but if it made more money, you do have to pay the difference in tax.If you are “offshore” for tax purposes, file your returns and always keep proper records.
It’s the IRD’s job to collect tax revenue, so if your business holds “offshore” status, the IRD will ask you to not only file a tax return periodically but also submit additional supporting information to show that none of the profits were derived in Hong Kong. Keep in mind that being classified as “offshore” can increase your administrative burden rather than decrease it.
For advice related to the tax system in Hong Kong, reach out to us. We are specialized in working with organizations based in other countries and will provide you with the most relevant service and information.
