Essential things to know about the profit tax system in Hong Kong

Hong Kong, renowned for its vibrant economy and business-friendly environment, is an attractive destination for entrepreneurs and investors. As you embark on your journey to establish or expand your business in this dynamic city, it is essential to understand the profit tax system. In this article, we will explain the intricacies of Hong Kong's profit tax regulations and will provide you with the knowledge necessary to navigate this aspect of doing business in the region.

Understanding profit tax in Hong Kong

Profit tax, also known as corporate tax, is imposed on the assessable profits of corporations operating in Hong Kong. The current tax rate stands at 16.5% for corporations, while unincorporated businesses are subject to personal assessment rates, which are typically lower. For more information on Hong Kong's profit tax system, look these up here. It's crucial to distinguish between profits that are assessable and those that are not, as only assessable profits are subject to taxation. Assessable profits include income derived from or accrued in Hong Kong. Non-assessable ones consist of income generated outside of Hong Kong. To determine the assessable profits, companies must maintain accurate records of their income and expenses, ensuring proper accounting practices are followed.

Taxation of foreign-sourced income

One of the significant advantages of Hong Kong's profit tax system is its territorial basis. This means that income earned outside of Hong Kong, even if remitted to the city, is generally exempt from taxation. This policy encourages international businesses to establish their regional headquarters or holding companies in Hong Kong, providing a favorable tax environment. However, it is essential to understand the concept of "deemed assessable profits" in certain situations. If a Hong Kong company has a branch or office overseas that earns income directly related to the business carried out in Hong Kong, such income may be deemed assessable and subject to tax. To navigate this aspect effectively, seeking professional advice is recommended.

Tax deductions and allowances

To arrive at the taxable profits, businesses are allowed to deduct various expenses incurred in the production of assessable profits. Common deductions include rent, salaries, depreciation of assets, and business-related expenses. By carefully documenting these expenses, businesses minimize their tax liabilities. In addition to deductions, Hong Kong offers certain allowances that further reduce the tax burden. For instance, companies engaging in research and development activities can benefit from enhanced deductions for qualifying R&D expenditures. Similarly, there are allowances available for capital expenditure incurred on environmental protection installations or machinery.

Filing requirements and compliance

Hong Kong follows a self-assessment system, wherein taxpayers are responsible for determining their assessable profits and filing annual tax returns. To ensure compliance, companies must maintain proper accounting records, including supporting documents, invoices, and receipts. These records should be retained for at least seven years. Tax returns must be filed with the Inland Revenue Department within three months from the date of issuance. Late filing or non-compliance can result in penalties and adverse consequences. Engaging a professional tax advisor such as Primasia or using specialized accounting software will help you to streamline the process and ensure accuracy.

Double taxation relief and tax treaties

To avoid the double taxation of income, Hong Kong has entered into comprehensive double taxation agreements with over 40 jurisdictions worldwide. These agreements provide relief to businesses by eliminating or reducing tax liabilities in both Hong Kong and the partner country. The double taxation agreements typically allocate taxing rights to avoid duplication of taxes and facilitate the exchange of information between tax authorities.