Hong Kong taxes corporations on profits arising in or derived from Hong Kong at 8.25 per cent on the first HK$2 million and 16.5 per cent on the rest; only one connected entity can use the lower tier. The company completes the profits tax return the Inland Revenue Department issues, normally with audited accounts.
Profits tax is charged on the assessable profits of a person carrying on a trade, profession or business in Hong Kong, so long as those profits arise in or are derived from Hong Kong. For a corporation the first HK$2 million of assessable profits is taxed at 8.25 per cent and the balance at 16.5 per cent. An unincorporated business uses 7.5 per cent and 15 per cent.
The lower tier is a single allowance per group. Where several companies are connected, for example under common ownership or control, they must nominate one of them to claim the first-tier rate, and the others are taxed at the standard rate from the first dollar. A founder who runs a trading company and a service company side by side should decide which of them has the larger profits and nominate that one, because the nomination cannot be split.
There is no capital gains tax, no tax on dividends received or paid and no VAT or GST in Hong Kong, which is why the tax return concentrates on identifying profit and the correct source of profit. Salaries tax for employees is a separate tax, assessed on individuals, not on the company.
Hong Kong does not tax profits just because the company is incorporated here. It taxes profits that arise in or are derived from Hong Kong. The test, expressed in the Inland Revenue Department's published guidance on the locality of profits, is to look at what the taxpayer did to earn the profit and where it did it. A trading company that negotiates, contracts and ships from Hong Kong has onshore profits; a company that only sits in Hong Kong while the work is done elsewhere may have a case for offshore treatment.
The claim is made in the profits tax return and the burden of proving it is on the taxpayer. The topic of offshore claims is handled separately, but for planning purposes the lesson is that the accounts must allow your accountant to separate onshore from offshore revenue and expenses. If everything sits in one undivided ledger, nobody can support an apportionment.
Since 2023 a foreign-source income exemption regime applies to certain passive income, such as dividends, interest, disposal gains and intellectual property income, received in Hong Kong by members of multinational groups. Relief depends on meeting an economic substance or similar test, so a group should consult its tax adviser before assuming such income is untaxed.
The Inland Revenue Department generally issues profits tax returns to corporations in April for the year of assessment that ended on the previous 31 March, and the company has about one month to file, although extension arrangements are available, most commonly through a tax representative. Check the date printed on your return and the notice, because the period begins from the date of issue.
A company must file a return even if it has made a loss, and a company that does not carry on business should say so rather than ignore the notice. A corporation is generally expected to submit its audited financial statements with the return together with a tax computation that starts from the accounting profit and adjusts it for items such as depreciation, which is replaced by tax allowances, and expenses that are not deductible.
Typical adjustments include disallowing private or domestic expenses and capital expenditure, adding back accounting depreciation and claiming allowances instead, and excluding capital profits and non-taxable income. Losses can be carried forward without a time limit against future profits of the same business, but cannot be carried back.
After assessing the profits for a year, the Inland Revenue Department issues a notice of assessment and demands provisional tax for the following year, usually payable in two instalments. If you expect profits to fall materially, you can apply to hold over part of the provisional tax; if the application is too optimistic and the actual profit is higher, interest and surcharges can follow, so do not use it casually.
If you disagree with an assessment, you generally have one month from the notice to submit a written objection stating your grounds. Missing the deadline limits your options, so make a diary entry the day the notice is received. Keep tax payment and objection in separate tracks, since an objection does not automatically suspend payment unless a holdover is agreed.
The department can raise additional assessments for up to six years after the end of the year of assessment, and for up to ten years in cases of wilful evasion or fraud. That is another reason the seven-year record retention rule is not optional.
The cleaner the ledger, the shorter the accountant's job. Code each expense so that private items, entertainment, fixed asset purchases, directors' current accounts and related-party transactions can be isolated. Record foreign-currency transactions at the rate used consistently by the company. Keep contracts, correspondence and delivery documents for revenue that may be claimed as offshore.
4softerp is a multi-company financial ERP and accounting module for recording transactions and keeping the books of several entities in one place. It does not calculate profits tax, does not generate the tax return and does not communicate with the Inland Revenue Department; those tasks stay with your accountant. 4invoices issues PDF invoices and keeps an invoice archive, so sales documents are easy to retrieve when the computation is prepared.
Incomplete income and expense records mean the accountant spends days filling gaps before the return, and errors creep in.
Record every invoice and expense in 4softerp, a multi-company financial ERP, and have your accountant prepare the tax computation. The system does not compute profits tax or file the return.
Some profits arise outside Hong Kong, but there is no evidence of their source to support an offshore claim.
Keep the contracts and correspondence that show where profits arise in your own filing, and agree with your accountant how to tag offshore income in the books. There is no automatic tagging or linking of contracts to transactions.
Corporations pay 8.25 per cent on the first HK$2 million of assessable profits and 16.5 per cent on the remainder. Unincorporated businesses pay 7.5 per cent and 15 per cent. Where several entities are connected, only one can claim the lower tier. There is no VAT, no tax on dividends and no capital gains tax, so the computation focuses on separating taxable profit from non-taxable items.
The Inland Revenue Department generally issues corporate returns in April and gives about a month to file, counted from the date of issue. Extensions are available, usually through a tax representative. A company must file even if it has made a loss. Check the date printed on your return, because late filing can lead to estimated assessments and penalties.
Only profits that arise in or are derived from Hong Kong are taxable, so a properly supported offshore claim can result in no tax. The company has to prove where its profit-producing operations took place, and the department examines contracts, decision-making and service delivery. Do not assume an overseas customer base is enough; get your accountant to review the facts.
A corporation is generally expected to submit audited financial statements and a tax computation with its profits tax return, with limited exceptions such as dormant companies. Your accountant can confirm whether any relief applies to you. Keep the signed accounts and the computation with your records for at least seven years.
No. Losses in Hong Kong can be carried forward without a time limit against future profits of the same business, but they cannot be carried back to earlier years. Record the loss in the computation each year so it is available when the company becomes profitable. Changes in ownership or business activity can affect whether a loss can be used.
A financial ERP for your books; the profits tax return is filed with the IRD.
