Calculating Taxable Income in Hong Kong
Nowadays investors and entrepreneurs look to set up their business overseas, especially in areas like Hong Kong. The moment you have decided to set up a business in Hong Kong, it’s already a win-win situation. With its proximity to the mainland Chinese market and strong government support for innovation, it has emerged as one of the preferred locations for global enterprises.
Businesses and individuals in Hong Kong enjoy one of the most tax-friendly systems in the world. There are many perks to starting a business in Hong Kong, and one of them is tax. In this article, we’ve broken down the essential Hong Kong taxes you should take note of as you go about establishing your business in Hong Kong.
Profits Tax in Hong Kong
Once you have gone through all the necessary paperwork, you might be wondering what’s next for setting up a company in Hong Kong. Well, this is what the focus of the articles is, which is Hong Kong corporate tax. Paying taxes is just another one of those inevitable realities of life and doing business.
Hong Kong corporate tax, which is also known as profits tax in Hong Kong, is calculated on the company’s assessable profits. The assessable profits are calculated by making various adjustments to the company’s net profit and loss accounts for the taxable period. You can have peace of mind by knowing that Hong Kong generally has a highly attractive tax regime like the profits tax stamp duty in Hong Kong, with low personal and corporate tax rates.
Corporate Tax Rate in Hong Kong
Corporate tax is the tax imposed on the firm’s profit by the government. Hong Kong is world-renowned for its simple and low tax system. Hong Kong follows a territorial system of taxation, with the corporate income tax collected from companies. It is the amount based on the net income companies obtain while exercising their business activity, typically during a business year.
The concept of taxation followed by Hong Kong does not apply to benefits whose source is outside Hong Kong. This means if you carry on business in Hong Kong, but the profits of the company are derived elsewhere, you are not liable to pay the profit tax.
Likewise, this territorial principle does not distinguish between residents and non-residents. If a non-resident acquires earnings from Hong Kong, they will be liable to pay profits tax in Hong Kong. Therefore, there is no distinction between residents and non-residents.
Corporations have two options for Profit tax rates; a single-tiered corporate rate or a two-tier profits tax regime. In the traditional method, a 16.5% tax is applied on assessable profits, and unincorporated businesses are taxed at 15%. Whereas in the two-tier regime, tax rates are applied to both corporations and unincorporated businesses by lowering the tax rate for the first $2 million of assessable profits.
This system significantly reduces the tax burden of most taxpaying small and medium-sized enterprises (SMEs).
- In case of corporations, the first HK$2 million of profits will be taxed at one-half of the current tax rate, and the remaining profits will continue to be taxed at the existing 16.5% tax rate.
- In case of unincorporated businesses, the first HK$2 million of profits will be taxed at one-half of the current tax rate, and the remaining profits will be taxed at the existing 15% tax rate.
Only one entity within a group of connected entities can enjoy the two-tier rates. For this purpose, the group will need to identify which entity will benefit and to make an election accordingly. The applicable tax rates are as follows:
|Assessable profits||Corporations||Unincorporated businesses|
|First HK$2 million||8.25%||7.5%|
|Over HK$2 million||16.5%||15%|
To avoid double benefits, the following enterprises shall be excluded from the two-tiered profits tax regime:
- Enterprises electing the preferential half-rate tax regimes e.g., professional reinsurance companies, captive insurance companies.
- The assessable profits for sums received by or accrued to holders of qualifying debt instruments as interest, gains or profits should already be taxed at half the rate;
- In the presence of a group of companies in HK, only one will be eligible for a two-tiered profits tax regime.
Who is liable to pay corporate tax in Hong Kong?
As per the Inland Revenue Ordinance (IRO), a person is responsible for paying Hong Kong corporate tax if the following conditions are met:
- The person carries on a trade, profession, or business in Hong Kong.
- The business that the person works on derives profits.
- The profits arise in or are derived under Hong Kong premises.
Concerning the last requirement, what is essential to note is that taxation in Hong Kong is based on the territorial source principle. This simply means that companies registered in Hong Kong will only be liable to pay taxes on profits that come from within Hong Kong.
Hong Kong companies that meet the requirements of the Offshore claim can be exempt from Hong Kong profits tax. Hong Kong adopts a territorial source principle of taxation, in which profits earned within Hong Kong are subject to 16.5% corporate taxation. However if the profits from activities are earned outside of Hong Kong, the company can apply for offshore tax exemption in Hong Kong. If you are carrying out your business activities entirely outside of Hong Kong, then your business qualifies for Offshore profit tax exemption.
To better understand this, here are some examples of activities that would qualify for offshore profits tax exemption:
- The company has no customers or suppliers for their business in Hong Kong.
- The company provides no services in Hong Kong.
- The company’s products do not enter Hong Kong.
The claim for offshore tax exemption is lodged together with the submission of the Profits Tax Return(PTR) and Audit Report. The Inland Revenue Department of Hong Kong typically issues profits tax returns in April, immediately after the end of the fiscal year of assessment. You need to submit the following documents with the profits tax return to IRD.
- Completed Profits Tax Return
- Auditor’s Report
- Tax computation claiming an offshore tax exemption, if applicable.
Calculating Taxable Income of Hong Kong Company
Profits tax in Hong Kong is calculated on a company’s assessable profits. The assessable profits are calculated by making various adjustments to the company’s net profit and loss accounts for the taxable period. Calculating Taxable income of a Hong Kong company needs various factors to be considered.
Determine Total Assessable Profits
In simple terms, assessable profits are computed as adjusted profit less losses before taking into consideration capital allowances, balancing allowances, and balancing charges. The first step in calculating taxable income is to determine the total assessable profits. An accurate assessment requires an examination of the nature of the profits and the transactions and operations.
Deduct Your Expenses
The vast majority of expenses incurred in the production of profits are deductible. This includes interest, rent, repairs, intellectual property, research and development, employee fund contribution, direct fees. Some of them are explained below:
- Interest: Interest payments on funds borrowed to finance a company’s operations and expansion are deductible.
- Rent: Payments on rent for facilities and offices used for the purpose of profit-making activities are deductible.
- Repairs: Any costs incurred to repair facilities, equipment, or other items in the production of profits may be deducted.
- Research and Development: Expenses for research and development are deductible. This includes expenses related to product development, design, studies, and market research.
- Director Fees: Remuneration expenses for directors are generally deductible.
Deduct Unutilized Expenses
Acquired losses can either be deducted from the company’s assessment in the same or upcoming years. In order to deduct expenses, these must have arisen from carrying business in Hong Kong. An adjustment applies when the unutilized expenses incurred from concessionary trading receipts. Concessionary trading receipts are set off against normal trading receipts and vice versa.
According to Hong Kong law, depreciation of a fixed capital asset and expenditure incurred on the purchase of fixed assets are not deductible for tax purposes. Instead, tax relief in the form of capital allowances is available for initial capital expenditure and annual depreciation for wear and tear. Capital allowances are available for business premises and for plant and machinery used in the production of profits.
Taxable income calculator
The simplest way to calculate the taxable income is to directly use the tax calculator. With the help of a simple tax calculator developed by the Inland Revenue Department(IRD), you can calculate your tax liability. In order to calculate the Salaries Tax at progressive rates on your net chargeable income or at the standard rate on your net income, whichever is lower. The simple formula to calculate net income is :
Net Chargeable Income = Total Income – Deductions – Allowances
Net Income = Total Income – Deductions
You can access the IRD’s taxable income calculator directly from their website.
A year of assessment runs from 1 April to 31 March of the following year. Provisional Salaries Tax for a year is usually based on the income less allowances of the preceding year. You must take care of specific points while using the tax calculator. Its correctness depends on whether you have entered the correct income figure, deductions, your marital status and the number of your dependants.
Hong Kong companies enjoy many benefits such as limited liability, complete foreign ownership, access to the China Mainland and other Asian countries, low taxation, shareholder privacy, fast registration, and low required share capital. Now that you know all about calculating taxable income and profits tax in Hong Kong, it would be easy if you plan to incorporate a business, or are already running a company.
In any case if you have any doubt about tax filing or related issues, it’s always better to hire a professional in order to complete all the documentation and provide advice for your company’s activities.
How Can Startupr help you?
We at Startupr can assist you in reviewing your current operations for filing your profits tax return. And in case your business transactions are outside of Hong Kong, you can apply for offshore tax exemptions from the IRD. We have a high success rate for tax exemption status for our clients conducting their activities outside of Hong Kong. Contact us for more information!