Profit tax is chargeable on the income that is arising in or derived from Hong Kong from such trade, profession or business. The determination of taxable income for profits tax purposes follows specific rules under the Inland Revenue Ordinance (IRO).
Territorial Source Principle
Hong Kong operates under a territorial tax system, meaning that only income and profits derived from or sourced in Hong Kong are subject to taxation. Although subject to the decision made by Inland Revenue Department, offshore profits, i.e., income generated outside of Hong Kong, are generally not taxed, even if the company is incorporated or based in Hong Kong.
Determination of assessable profits
Assessable profits are the net profits from business activities in Hong Kong, after deducting allowable expenses and certain deductions. Generally, all income sourced derived from or sourced in Hong Kong are subject to taxation.
However, there are special consideration on certain types of income, such as:
· Capital gains: deemed to be exempted from profit tax as the receipts are capital in nature, but subject to investigation if the practice of buying and selling investment instruments is too frequent.
· Interest income on bank deposits: deemed to be exempted under IRO, unless the deposit secures a borrowing with deductible interest expense.
· Interest income derived from trade or business in Hong Kong: taxable in profit tax if the borrower is carrying on trade or business in Hong Kong as it is derived from trade or business in Hong Kong.
· Interest income derived from trade or business outside Hong Kong: not taxable as the trade or business is not in Hong Kong.
· Dividends from Hong Kong companies: deemed to be exempted as already charged in the other Hong Kong companies.
Under the new Foreign-sourced income exemption, certain offshore income is deemed to be taxable in Hong Kong profit tax.
Deductions of expenses
Provided that the outgoings and expenses are incurred in the production of chargeable profits, companies can deduct the expenses to determine the taxable profits, which may include the cost of goods purchased, operating expenses such as salaries, rent, and outsourced services.
Some expenses are not allowed for the deductions due to the capital in nature, which may include acquisition of furniture and fixtures, expenses of depreciation and amortization and initial company set-up expenses. Instead of the amount recognized in the accounts, depreciation allowance will be applied for the deductions in computing the assessable profit.
From the year of assessment 2018/19, Research and Development expenditure are provided with enhanced deduction to encourage innovation.
· Type A Expenditure: 100% deduction for general R&D expenses.
· Type B Expenditure: Super-deductions of up to 300% for certain qualifying expenditures, such as wages paid to R&D employees or costs associated with R&D conducted by a qualifying institution.
Tax rate
Hong Kong introduced the two-tiered tax system in 2018 to support the small-and-medium sized enterprises. For the year of assessment 2023/24, the profit tax rate in Hong Kong is 8.25% for the first HKD 2 million assessable profit, and 16.5% for any profits exceeding HKD 2 million. The rates are subject to review every year.
Year of assessment
Profits tax is assessed based on the company’s accounting year. The year of assessment in Hong Kong runs from April 1 to March 31, but companies can choose their own accounting period. Generally, the reporting date of the company will determine which year of assessment to be fell into.
The IRO have a special provision for the new incorporations to have an 18-month period for their first audited accounts.
Profits Tax Return
The companies in Hong Kong have to submit Audited Financial Statements and the Tax Computation to the Inland Revenue Department (IRD), along with the Profits Tax Return (if any). Generally, the IRD issues the Profits Tax Return on April 1st of each year, with a return deadline of up to one month after issuance. This deadline can be extended upon request and subject to IRD review, which is generally granted according to the accounting date of the companies.
Accounting Date | Extended Due Date |
For N Code Returns(Accounting Date between 1 April to 30 November of the reporting year) | 2 May of current year |
For D Code Returns(Accounting Date between 1 to 31 December of the reporting year) | 15 August of current year |
For M Code Returns(Accounting Date between 1 January to 31 March of the reporting year) | 15 November of current year |
For M Code Returns (Accounting Date between 1 January to 31 March of the reporting year)and Current Year Loss Cases | 31 January of next year |
Records to keep
IRO requires the person or business, who carry on trade, profession or business in Hong Kong, to keep sufficient records of his income and expenditure for not less than 7 years to enable the assessable profits to be readily ascertained.
The records may include the books of accounts, invoices, agreements, payment records, bank credit advice, bank statements and other relevant supporting documents and information.
Failure to comply with the requirements of the Ordinance without reasonable excuse may be liable to a maximum fine of $100,000.
Other related obligation
Under the provisions of the Inland Revenue Ordinance, taxpayers are required to notify the IRD of any change of address within one month of the event, such as change of postal address and change of chargeability.
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