Introduction to Hong Kong Profits Tax

1. Definitions:

Profits Tax is a tax levied on individuals and businesses (including corporations, partnerships, trustees or bodies of persons) carrying on any trade, profession or business in Hong Kong in respect of the acquisition of income arising in or derived from Hong Kong (other than profits from the sale of capital in respect of assets).

2. Characterization:

The income tax model adopted in Hong Kong is not based on "tax residency" but on "territorial source", i.e. only profits derived from Hong Kong are regarded as "taxable income", whereas profits derived from outside Hong Kong are not subject to profits tax in Hong Kong.

3. Tax basis:

Profits tax is levied on profits (or losses) based on taxable income less chargeable expenses and costs in each tax (taxation) year.

4. Tax rates:

General Profits Tax Rate

Applicable corporate tax rate (for the year of assessment 2008-2009 and subsequent years): 16.5%.

Preferential Tax Rate

Qualifying Profits Tax rate for special sectors such as qualified treasury centers, professional reinsurers and authorized captive insurers, qualified aircraft lessors, qualified aircraft chartering managers and qualified ship chartering managers is 8.25%.

Two-tier profits tax system

The corporate profits tax rate is reduced to 8.25% for the first HK$2 million of profits and continues to be taxed at 16.5% for subsequent profits. For non-corporate entities such as partnerships, the two-tier profits tax rates are 7.5% and 15% respectively.

Affiliates of the same group can nominate only one business to benefit.

5. Timing of Hong Kong profits tax returns and payments

The tax period in Hong Kong is from April 1 to March 31, and you only need to file a return once a year. Generally in April each year, the Hong Kong Inland Revenue Department will issue a Profits Tax Return to the company. A Hong Kong company needs to submit the Profits Tax Return within one month after receiving it, but it can also apply for an extension according to the situation.

A newly registered Hong Kong company will usually receive the Profits Tax Return in about 18 months after its establishment, and it needs to submit the Audit Report and Profits Tax Return to the IRD within 3 months. For companies with second and more audited accounts, the IRD will usually issue the Profits Tax Return on the beginning working day of April every year, and they need to submit the audit report within one month after the date of issuance, and if they submit the return beyond the due date, the IRD may issue a penalty letter to the company.

Therefore, it is particularly important for Hong Kong companies to choose the year-end date to ensure that the company has sufficient time to do the audit and avoid penalties. If the tax return is filed through online e-filing, you can apply to the IRD for an additional two-week extension. If a Hong Kong company has been assessed as not required to pay tax for the previous year, the IRD will not normally issue a tax return to the company every year, and the actual tax return issued by the Hong Kong Inland Revenue Department will prevail.