Essential Corporate Tax in Hong Kong

The Essential Corporate Tax in Hong Kong.  These are the highlights if you want to know the essential of Corporate Law in Hong Kong.  This entry was drafted by Charltons Law Firm for “E-IURE COMPENDIUM” 2018. Link to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case “Charltons Law Firm” is an excellent option if you are looking for legal advice in Hong Kong.

The Hong Kong tax system is relatively simple in comparison with some of the more complicated systems in other countries. In Hong Kong, there are three separate direct taxes which are levied under the Inland Revenue Ordinance (Cap. 112) (the “IRO”). The three taxes are: profits tax, salaries tax and property tax. This collaboration focuses on Profits Tax.

Profits tax

The scope of the charge

Persons, including corporations, partnerships, trustees and bodies of persons carrying on any trade, profession or business in Hong Kong are chargeable to profits tax on the assessable profits arising in or derived from Hong Kong from such trade, profession or business.  No distinction is made between residents and non-residents. A resident may therefore derive profits from abroad without being subject to tax; conversely, a non-resident may be chargeable to tax on profits arising in or derived from Hong Kong.  Whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong are largely questions of fact.  However, some guidance on the principles applied can be found in cases which have been considered by the courts in Hong Kong and in other common law jurisdictions.

The basis of assessment

Tax is charged on the assessable profits for a year of assessment.  The assessable profits for a business which makes up annual accounts are calculated on the profits of the year of account ending in the year of assessment.  In the year of assessment itself, a provisional tax is required to be paid based on the profits assessed for the preceding year.  The provisional payment is applied in the first instance against profits tax payable on assessable profits for that year of assessment when agreed in the following year. Any excess is then applied against the provisional profits tax payable for that succeeding year.

Tax rates

The tax rates for profits tax applicable to corporations are as follows:

Note 1: 75% of the profits tax is waived subject to a ceiling of HK$20,000 per case for 2014/15 and onwards, HK$10,000 per case for 2013/14 and 2012/13, and HK$12,000 per case for 2011/12.

The tax rates for profits tax applicable to unincorporated business are set out as follows:

Note 2: 75% of the profits tax is waived subject to a ceiling of HK$20,000 per case for 2014/15 and onwards, HK$10,000 per case for 2013/14 and 2012/13, and HK$12,000 per case for 2011/12.

Exemptions and deductions

Dividends from a corporation which is subject to Hong Kong profits tax, as well as amounts already included in the assessable profits of other taxpayers chargeable to profits tax, are not included in the assessable profits of the recipient.

In general, all expenses, to the extent to which they have been incurred in the production of chargeable profits, are deductible.  They include (but are not limited to):

• Rent paid by any tenant of buildings or land occupied for the purpose of producing the assessable profits;

• Bad and doubtful debts (subject to certain rules);

• Repairs of premises, plant, machinery or articles etc used in producing the profits;

• Expenditure for registration of a trademark, design or patent and expenditure on the purchase of patent rights or rights to any know-how for use in Hong Kong in the production of assessable profits; and

• Expenditure on research and development (subject to certain rules).

 Tax incentives

Tax incentives are available in certain specific areas and these incentives include (but are not limited to):

• Immediate writing-off is allowed for capital expenditure on plant and machinery specifically and directly related to manufacturing processes, and on computer hardware and software.

• Capital expenditure on refurbishment of business premises is allowed to be written off over five years of assessment.

• Exemption from payment of tax on interest derived from any deposit placed in Hong Kong with an authorised institution (not applicable to interest received by or accrued to a financial institution).

• Accelerated deduction for capital expenditure on specified environmental protection facilities from year of assessment 2008/09 and onwards. For machinery or plant, 100% deduction will be allowed for the capital expenditure incurred. For installations forming part of a building or structure, 20% deduction will be allowed for each year in five consecutive years.

• 100% deduction for capital expenditure on specified environmental-friendly vehicles from year of assessment 2010/11 and onwards.

Loss relief

Losses incurred in an assessment year can be carried forward and set off against assessable profits in subsequent assessment years.

Books and records

All persons who carry on business in Hong Kong must keep sufficient records, in English or Chinese, of their income and expenditure to enable their assessable profits to be readily ascertained. There are statutory requirements to record certain specified details of every business transaction. Business records must be retained for at least 7 years after the date of the transaction to which they relate. Any person who fails to keep sufficient records may be subject to a fine of HK$100,000.