TAXATION

1. What are the current rates for Profits Tax?

Profits Tax rates

(1) Normal rate (for the year of assessment 2008/09 onwards)

(*If one of the partners in a partnership is a corporation, the Profits Tax rate on that partner is 16.5%)

Two-tiered rates (for the year of assessment 2018/19 onwards)

However, for “connected entities”, only one entity may be elected in its Profits Tax Return to be eligible for the two-tiered Profits Tax rates regime for a year of assessment.  The others would not qualify for the two-tiered Profits Tax rates.

An entity is a "connected" entity of another entity if:

• one of them has "control" over the other; or
• both of them are under the “control” of the same entity;

For sole proprietorship business, one is "connected" to another if it is carried on by the same natural person.

"Control" generally refers to directly or indirectly owning or controlling, or being entitled to directly or indirectly own or control, more than 50% of issued share capital, voting rights, capital, or profits in another entity.

(2) Concessionary rate

Concessionary tax rates may apply to certain qualifying profits received or derived from certain eligible transactions/activities, such as from “short and medium debts instruments” issued before 1 April 2018 (currently 8.25%), qualifying debt instruments issued on or after 1 April 2018 (currently 0%), running of corporate treasury centre for the year of assessment 2016/17 onwards (currently 8.25%), aircraft and ship leasing (currently 0% or 8.25% as the case may be), professional reinsuring for the year of assessment 2018/19 onwards (currently 8.25%), insuring for the year of assessment 2020/21 onwards (currently 8.25%), family office for the year of assessment 2022/23 onwards (currently 0%) etc. Taxpayers who wish to take advantage of these tax concessions should seek professional advice from their tax advisors to see if they are eligible.

(3) Other assessment methods 
 

There are circumstances where certain classes of taxpayers demand alternative assessment methods, such as insurance corporations, ship owners and aircraft owners.

2. What are “assessable profits”? How to interpret the “basis period” for Profits Tax purposes?

The term “profit” is not clearly defined in the Inland Revenue Ordinance. In general, the assessable profits (or adjusted loss) are calculated by normal accounting principles with further reference to the statutory allowable income/receipts and deductions for the basis period. The basis period is not necessary the same as the year of assessment (1 April to 31 March of the following year).

The basis period of your business can be either: 

1. the year ended 31 March during the relevant year (i.e. same as the year of assessment);
2. where the annual accounts are made up to any day other than 31 March, the year ended on that day in the relevant year (e.g. if your company's annual accounts closed on 31 May every year, the account you have to submit in the year of assessment 2022/23 will be from 1 June 2021 to 31 May 2022);
3. where the accounts are made up for each lunar year, the lunar year ended in the relevant year;
4. for cessation or transfer of business, special rules apply where the business does not cease but is transferred to or carried on by another person and where a business which commenced before 1 April 1974 ceases; or 
5. where you commence a new business, please refer to the following:

"Basis period" for Profits Tax in the case of a new business 

Suppose your business commenced on 1 July 2020 and your company's accounting period ends on 31 December every year (i.e. the first accounting period ends within the year of assessment 2020/21), the basis periods would be: 

• Year of assessment 2020/21: 1 July 2020 – 31 December 2020;
• Year of assessment 2021/22: 1 January 2021 – 31 December 2021

If your business commenced on 1 July 2020 but the accounting period ends on 31 May every year (i.e. the first accounting period does not end within the year of assessment 2020/21), the basis periods would be: 

• Year of assessment 2020/21: Nil
• Year of assessment 2021/22: 1 July 2020 – 31 May 2021
• Year of assessment 2022/23: 1 June 2021 – 31 May 2022

3. Is there any difference in the reporting requirements for a sole-proprietorship business and a partnership business?

The reporting requirements are basically the same but the relevant Tax Returns are different: 

• For a sole proprietorship business, the proprietor should declare the profit / loss in Part 5 of the Tax Return – Individuals (B.I.R. 60).
• For a partnership business, the precedent partner should complete and sign a Profits Tax Return - Persons Other Than Corporations (B.I.R. 52).

When there is a change from sole-proprietorship to partnership during the accounting year or vice versa, the profit / loss for the full year should be reported in the Profits Tax Return - Persons Other Than Corporations (B.I.R. 52) in the name of the partnership business.

5. I run a business on my own and need to declare “assessable profits” in the tax return. Must I engage a professional accountant to prepare the accounts?

There is no requirement under the law for engaging any professional service for the preparation of accounts for sole-proprietorships or partnerships. If you possess the necessary accounting and taxation knowledge, you may prepare your own accounts. You may also employ a bookkeeper to do so.

Since the calculation of accessible profits always involves the use of accounting principles, you may find it both helpful and safer to hire an accountant/auditor to handle your taxation matters.

6. If I have not appointed any accountant to handle my company's taxation matters, are there any calculation aids available to help me compute the "assessable profits"?

The "assessable profits" are the net profits (or losses) for the basis period, arising in or derived from Hong Kong and calculated in accordance with the Inland Revenue Ordinance.

The Inland Revenue Department has provided samples of Proforma Tax Computation Form (Form IR 957A(e))(for sole-proprietorship business), and Pro forma Profits Tax Computation Form (Form IR957) (for partnership business). You may use these forms to make the necessary adjustments to your net profit in your accounts in order to arrive at the amount of profit you will be assessed on.

If you have further queries about the computation method, please seek professional advice from a certified accountant or professional tax advisor.

7. Can I apply for paying less tax, or for the holding over (deferring payment) of Provisional Profits Tax?

There are some grounds for the holdover of Provisional Profits Tax as stipulated in section 63J of the Inland Revenue Ordinance, including:

• Your assessable profits are, or are likely to be, less than 90% of the assessable profits for the year before the year of assessment. 
• The amount of any loss brought forward for set off to that year of assessment has been omitted or is incorrect.
• You have ceased, or will cease, to carry on your trade, profession or business and assessable profits are, or are likely to be, less than the assessable profits for the year preceding the year of assessment.
• You have elected for Personal Assessment for which Provisional Tax was charged, and the election is likely to reduce your liability to tax.
• You have objected to your assessment for Profits Tax for the year preceding the year of assessment for which Provisional Tax was charged.

Your application must be made in writing and received by the Inland Revenue Department not later than 28 days before the due date for payment of the Provisional Tax, or 14 days after the issue of the demand note concerned, whichever is the later. Supporting documents may be required depending on the grounds relied on.

8. The gross income of my sole-proprietorship business during the year was below $2,000,000. Do I need to retain this year's business records, and if so, for how long? Do I need to attach the Balance Sheet and Profit & Loss Accounts to my Tax Return?

Starting from 1 April 2023, small corporations and businesses with gross income not exceeding HK$2,000,000 will no longer be permitted to file their Profits Tax Returns without supporting documents (including financial statements and tax computation), regardless of whether the tax returns are filed in paper form or electronically. 

According to section 51C of the Inland Revenue Ordinance, any person carrying on a business in Hong Kong must keep sufficient business records of income, expenditure, assets and liabilities, in English or in Chinese, to enable his/her assessable profits to be readily ascertained. Records relating to any business transaction must be retained for at least 7 years after the completion of the transactions, acts or operations to which they relate.

Failure to keep sufficient records may result in a fine of up to $100,000, and estimated assessments being raised on your business.

9. If not every receipt/income from my business is taxable, which is taxable and which is not?

General Rule

Receipts arising from day-to-day business operations are normally your operating income and are taxable.

Proceeds from the sales of fixed /capital assets are capital receipts and are usually non-taxable.

Income closely connected with your business operations is also taxable, including:

• rental income received from sub-letting part of your business premises;
• rebates received from trade associates; and
• the forfeiture of trade deposits or compensation money from customers arising from the cancellation of ordinary business contracts.

Sale proceeds arising from the sale of your business entity as a going concern or of your fixed assets are normally of capital nature and are non-taxable. You should however keep in mind the specific provisions in the Inland Revenue Ordinance which relate to the treatment of stock and machinery and plant under such circumstances (seek advice from a practicing lawyer or accountant if required).

Dividends received from a corporation which is subject to Profits Tax are generally excluded from the assessable profits of the recipient.

Examples of taxable income/receipts:

• trade debts that were claimed irrecoverable, and deducted from the previous years' assessable profits, but which have subsequently been recovered from customers;
• grants and subsidies (unrelated to capital expenditures) you received from the Government or other parties;
• rental/charges for the hiring of your computers, equipment and machines;
• sum recovered from an insurance policy for loss of trading stock; and
• sums received for the transfer of a right to receive income.

Under the Inland Revenue Ordinance, there are also certain sums that are deemed to be receipts arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong, which include:

• sums received from the exhibition or use in Hong Kong of cinematography or television film or tape, sound recording or their connected advertising materials;
• sums for the use or right to use in Hong Kong of a patent, design, trademark, copyright material or a secret process/formula etc.; and
• sums received for the use, or the right to the use, outside Hong Kong when such sums are deductible in ascertaining the assessable profits of a person under Profits Tax, of any patent, design, trade mark, copyright material or a secret process or formula etc.

 Examples of non-taxable income/receipts: 

• proceeds from the sale of fixed/capital assets;
• proceeds from the sale of business interests/goodwill;
• compensation for early termination of business tenancies;
• dividends from corporations subject to Profits Tax separately;
• amounts already included in the assessable profits of other persons chargeable to Profits Tax; and
• interest on Tax Reserve Certificates.

10. If not every expense/outgoing is deductible from the assessable profits, which ones are deductible?

General Rule

Business expenses related to your day-to-day operations are normally deductible as your operating expenses to the extent which they are incurred during the basis period for that year of assessment in the production of profits chargeable to Profits Tax, such as: 

• rents paid on business premises/quarters for employees;
• light, water and telephone charges for business premises;
• salaries, wages, allowances, bonuses for the hiring of employees;
• employer's mandatory and voluntary contributions to MPF schemes or MPF-exempted Recognized Occupational Retirement Schemes (but the deduction is limited to 15% of the total emoluments of the employee for the period to which the payments relate);
• MPF mandatory contributions as a self-employed person for the sole proprietor or partner, currently not exceeding $18,000 per year per person for the year of assessment;
• severance or long service payments paid at the termination of employment;
• interest on funds borrowed for normal business operations, such as for the purchase of stock (but must satisfy the conditions laid down in section 16(2) of the Inland Revenue Ordinance;
• bad or doubtful debts (i.e., sales duly recognized as your turnover but for which you cannot collect payments from customers);
• costs of repairing articles, premises, machinery and plant used in producing profits;
• approved charitable donations of not less than $100, but not exceeding 35% of your assessable profits.
• costs of replacing implements and utensils used in producing profits (no depreciation allowance would be allowed in respect of the same items); 
• expenditures on the purchase of patent rights or rights to any know-how, or specified intellectual property rights for use in the production of chargeable profits (However, the relevant patent rights or rights to any know-how must not be purchased from an associated or related person);
• expenditures on research and development (R&D) including market, management and business research, design-related expenses and payments for technical education subject to certain rules. With effect from the year of assessment 2018/19, for qualifying expenditure incurred on certain domestic R&D, the first $2 million is eligible for a 300% tax deduction and the amount beyond $2 million is eligible for a 200% deduction; and

There are also some other allowable deductions by way of tax incentives which include but not limited to: 

• registration costs of a trademark, design or patent for use by the business;
• capital expenditures on environmental protection facilities;
• payments for technical education subject to certain rules;
• 100% write-off of cost in the year of purchase of a “prescribed fixed asset”, which includes: machinery or plant used specially and directly in any manufacturing process, computer hardware (other than that which is an integral part of any machinery or plant), and computer software and computer systems, but does not include any leased item or item acquired under hire-purchase terms;
• capital expenditures incurred on the renovation or refurbishment of buildings by 5 equal deductions over 5 successive years of assessment;
• industrial building allowance; and
• rebuilding allowance for commercial buildings.

11. Which expenses/outgoings are NOT deductible from the assessable profits?

Expenses not deductible include (this is not an exhaustive list):

• any loss of capital;
• withdrawals by the sole proprietor/partners;
• any withdrawal of capital;
• any expenditure of a capital nature (e.g. purchase fixed assets);
• the costs of any improvements;
• rent or expenses relating to premises not occupied for the purpose of producing assessable profits;
• any sum recoverable under insurance or contract of indemnity;
• taxes paid under the Inland Revenue Ordinance, except Salaries Tax paid in respect of employees’ remuneration;
• any remuneration or interest on capital or loans payable to:
  for a sole proprietorship - the proprietor or the proprietor's spouse, 
  for a partnership - the partners or their spouses;
• domestic or private expenses, including: 
  medical expenses, insurance premiums, birthday celebration expenses for the sole proprietor/partners and their family members, etc., and 
  costs of travelling between residence and place of business;
• traffic penalty incurred during the delivery of goods to customers (this is a fine for breaking the law);
• any sum not expended for the purpose of producing assessable profits.
• contributions made to a mandatory provident fund scheme in respect of the proprietor (except mandatory contributions) or the proprietor's spouse or, in case of a partnership, to its partners (except mandatory contributions) or their spouses.