What are tax reliefs for SMEs in Hong Kong?

Compared to other countries, Hong Kong has a relatively low tax rate and a straightforward tax system, making it an attractive place for businesses to establish operations. Even though Hong Kong’s taxes are on the lower end of the spectrum when compared to those of other nations and localities, Hong Kong residents are nonetheless required to pay taxes.

Starting or currently operating a small company in Hong Kong requires careful tax planning to ensure the lowest feasible rates are paid. Obviously, you don’t want to overpay the government in taxes. Here, we’ll go through the basics of taxable income, the difference between tax deductible and non-tax deductible expenses, and tax relief benefits for SMEs that your business may take advantage of.

Taxable income and SMEs 

Tax on profits is levied on profits earned in Hong Kong, except for capital gains. Hong Kong often uses the “operations test” to trace back earnings to their source, which entails figuring out which actions had the greatest impact on revenue generation and the site at which they are performed. To know how tax benefits for SMEs work and how to reduce taxable income, you must have a comprehensive idea of what taxable income is.

What is taxable income in Hong Kong?

Taxable income refers to the type of revenue forms that are eligible to be taxed. There are three main forms of taxable income. They are profits generated as a business establishment, salary or income received as an employee of an organization, and income from properties. 

• Profits generated as a company – Only profits generated in Hong Kong through the practice of a trade, business, or profession will be subject to taxation. The Hong Kong government does not tax profits earned from activities outside the city. Thus, if you run a company in Hong Kong but raise profits from somewhere else, you don’t have to worry about paying profit tax in the city, even if you send some of that money back home.
• Salary received as an employee of the company– According to the territorial concept, locals and visitors are treated equally. Even if you legally live in Hong Kong, you are exempt from paying tax on your salary or income earned in other countries. You must submit a personal tax return and remit Salary Tax if you get any compensation from the firm, such as wages as an employee, director fee, or bonus.

Tax break benefits for SMEs in Hong Kong 

When it comes to paying their taxes, small companies may benefit greatly from tax breaks. It also aids your organization in increasing its profitability and bolstering its operations. Your organization will reap long-term benefits from taking advantage of these exemptions. There are no standard breaks on tax rates for SMEs. However, certain special deductions may apply. Read on to know how such tax reliefs work in Hong Kong.

Tax rates for SMEs in Hong Kong 

Companies in Hong Kong may choose between two different Profit Tax Rates: The simplified tax structure for corporations, known as the Single-tier tax system, and the tax structure with two rates on earnings, called the two-tier tax system.

Single-tier Corporate Tax System– Under the Single-Tier Corporate Tax System, companies only pay 16.5 percent tax on their taxable income, while sole proprietors pay 15 percent.

Two-tier Corporate Tax System – Businesses, whether incorporated or unincorporated (businesses are usually owned by one person with unlimited liability because the business is not legally registered as a corporation), may take advantage of the Two-Tier Profits Tax System, which reduces the tax rate on the first $2 million in earnings.

This means corporations will have their first HK$2 million in earnings taxed at half the present rate of 8.25%, with the remainder taxed at the current rate of 16.5%.

Unincorporated enterprises will have their first HK$2 million in earnings taxed at 7.5%, the same rate as the first HK$1 million, and their remaining profits taxed at 15%. 

This means corporations will have their first HK$2 million in earnings taxed at half the standard rate (i.e. 8.25%), with any further profits being taxed at the standard rate of 16.5%.

For unincorporated companies, your first HK$2 million in profits will be subject to  7.5% taxation, while further profits would be taxed at the standard rate of 15%.

The two-tiered pricing is only available to a single “entity” within a set of linked entities.  The group has to determine which entity should gain an advantage and make a choice in that direction.

Tax reduction for SMEs Hong Kong 

In 2019, the Legislative Council of Hong Kong enacted the Inland Revenue Department Bill. Tax reduction policies were formulated to ease the burden of SME taxes in Hong Kong. For instance, Profit tax, salary tax, and personal assessment tax for the financial year 2018/19 are each reduced by 100% for a single year, up to a maximum of HKD 20,000 in revenue. Also, during the assessment year 2013/14 onwards, captive insurers will be eligible for a tax break in the form of a 50% decrease in the profits tax on offshore risk insurance activity. For purchases of patent claims, expertise, copyright laws, design rights, trademark rights, rights in the design, and performance made by businesses after April 1, 2018, are no longer deductible as capital expenditures for profit tax purposes.

What are tax-deductible and non-tax-deductible expenses? 

To the extent that they are incurred in the course of making a profit, business costs incurred in Hong Kong are tax deductible. A business cost is tax deductible if it contributes to the generation of taxable income and is not of a capital type. A few examples of tax-deductible expenses are:

• Interest costs, including those associated with paying interest on a loan,
• Commercial Lease of a Rental Property
• Income taxes that are incurred abroad. This will be taxable in the country of origin.
• Cancelled debt
• Professional development via technical training
• Renovating an Older Building

But, non-business-related costs are often not tax deductible. A few examples of non-tax deductible expenses are:

• Expenses incurred inside the country that are not directly tied to a company
• Working capital shortfalls
• Amount spent on home enhancements
• Indemnity payments, insurance settlements, and similar amounts
• Non-business-related rental income or costs
• Expenses deducted from a company’s earnings

Tax reliefs for SMEs in Hong Kong

Profits from small enterprises will be eligible for tax relief. This limit will be imposed on each taxpayer for purposes of salary tax. When owners of businesses are subject to both a salary tax and a profits tax, they will be eligible for tax breaks under both systems. During the year of evaluation 2020/2021, the Financial Secretary recommended in May 2021 a one-time reduction of 100% of profits tax, salary tax, and personal assessment tax, up to a maximum of HK$10,000.

Profit Tax/ Income Tax Deductions

Taxes as a small company owner will be levied on your net earnings rather than your total sales. This means that you may deduct from your taxable income any costs that directly contributed to earning this profit. The following are all eligible for reductions under Inland Revenue Department Ordinance (Sec 16):

• Prices associated with building maintenance and repair
• Investment in IT Infrastructure and Physical Assets
• Equipping buildings with environmental safeguards
• Allowances for depreciation of property or equipment.

Depreciation allowances

Depreciation allowances are also tax deductible for businesses. But, remember that there are guidelines you must observe. After the first year of constructing a factory, the owner may subtract 20% of the initial investment. Furthermore, you are entitled to an annual deduction equal to 4% of the initial cost of the building’s construction until the whole amount is reimbursed.

Corporate Tax

In the year of assessment 2018/19, the two-tier profits tax rates scheme took effect for taxpayers. It aims to drastically bring down the tax burden of SMEs. Corporations will pay 8.25% on the first HK$2 million in profits and 16.5% on the rest. Unincorporated small enterprises operate differently. Profits up to HK$2 million are subject to taxation at a rate of 7.5%,  and the remainder at the rate of 15%.

Tax Treatment on Losses

When a company operates in more than one line of business, it might use the losses from one line of business to balance the benefits from another line of business. Group alleviation of losses, or the sharing of business losses among affiliated businesses, is not permitted in Hong Kong. No past losses can be recovered. No deductions can be made for costs associated with a capital loss. 

There are unique rules on how losses from concessionary trading operations and regular trading activities should be adjusted for profits or losses that are subject to a reduced tax rate.

If a person files for Personal Assessment after incurring a trading loss, that loss will be deducted from his taxable income.

Relief from double taxation 

The anti-double taxation provisions may be found in general DTAs or tax codes. Hong Kong has four approaches to reducing double taxation:

• Tax credit alleviation – Foreign tax is applied against local tax on the same income. Under the credit approach, the resident jurisdiction is obligated to award a tax incentive payable in the country of source.
• Tax exemption- Overseas income is tax-free. A 100% exemption on foreign income is possible.
• Tax reduction-Interest, dividend payments, and royalties are often eligible for these tax breaks.
• Relief by deduction- Foreign earnings is subject to domestic taxation once foreign tax liabilities have been subtracted.

Tax relief benefits for SMEs in Hong Kong 

Tax relief is helpful for SMEs in many ways. It is also important to seek guidance from a professional service provider to reap the tax relief benefits for SMEs to their fullest.

If you have the right plan in place to pay your taxes effectively, the following benefits can help your further grow your business. 

• It helps you save money you might otherwise spend on taxes
• It can boost your business’ profit level.
• Increased revenue and profits can lead to business expansion

How to reduce taxable income in Hong Kong?

You can bring down your taxable income to a considerable level by following four steps. The procedure includes determining your net assessable profits, subtracting your business expenses from them, removing the items that are redundant, and finally adding up some balancing charges. This will help you assess what comes in and goes out of your business account and help you reserve better for the future.

• Determine Total Assessable Profits – The term “total assessable earnings” is used to describe the sum of all profits you made within a given fiscal year. These funds might originate from Hong Kong-based business activities, lease revenue from moveable assets, interest income, and government grants and subsidies.
• Subtract business expense – Expenses for the maintenance and repair of your building, machinery, and equipment, as well as the cost of any necessary research, are all tax deductible that you must subtract from the net profits.
• Remove unused items– These are the costs associated with operating a company in Hong Kong that could be subtracted from future earnings. Capital allowances allow for the yearly depreciation of assets like equipment and industrial facilities. Depreciation may range from 10% to 30% every year.
• Include balancing charges– Verify that no unreasonable requests for tax breaks for small businesses are being made. Even if you add balancing fees, you should still boost your assessable profit. These costs are incurred if the proceeds generated by the capital asset sale are higher than the asset’s book value.

Get expert assistance filing tax for your company with Startupr!

You may now understand how tax relief benefits for SMEs in Hong Kong work. However, to be eligible to receive those benefits you need effective tax planning and filing. Inaccuracies can make your request for tax reductions be ignored. This is why a professional accounting expert’s guidance is recommended.

At Startupr, we offer exclusive accounting and tax filing services customized to your business needs. Also, Company Renewal, Employer’s Return, Commencement, Corporate Seal Service, and a specialized online document ordering system are just some of the new services we are introducing to better serve your company’s requirements. If you want to avail of our services or have more queries, connect with us!