hong-kong-profits-tax

Everything about Hong Kong Profits Tax

Introduction

Salaries Tax, Profits Tax and Property Tax are the only 3 income taxes imposed in Hong Kong. This section focus on only the Profits Tax involved when an individual, a partnership and an body incorporate (i.e. company) carrying on business in Hong Kong, for the other fee and duty involved, we are going to talk about it here.

Brief of Assessment

Profits tax is levied under the Inland Revenue Ordinance (IRO) on the “assessable profits” of legal persons, including individuals (i.e. sole proprietorships), corporations (i.e. company), partnerships, trustees as well as bodies of persons carrying on any trade, profession or business in Hong Kong.

The tax is levied according to the “territorial source principle” meaning that it is the geographical “source of the income” rather than entities’ residency status (i.e. residential or non-residential status of the entity) that determines whether income is subject to Hong Kong Profits Tax or not.

The IRO contains no exemption from profits tax for offshore companies. Whether an offshore company is liable to profits tax depends on the nature and extent of its activities in Hong Kong.

Definition of a Bodies of Persons

Generally, a “person” is chargeable to profits tax when this “person” is either an individual, a partnership or a corporation, and carrying on business in Hong Kong.

When a “person” carrying on a business or a trade in Hong Kong does not belong to the the type of individual, partnership, and corporation, this person  belongs to a body of persons – maybe a club, a trade union or a trade association. These “persons” may still be chargeable but subject to special provisions of the Inland Revenue Ordinance.

Briefly speaking, a charity is exempt from tax if it does not carry on business or trade. As established from case, a charity must be acting as follows:

  • relief of poverty
  • advancement of religion
  • furtherance of education or
  • any activities concerning public benefit.

Political organizations do not usually meet these criteria. If the owner of an organization claims to be acting as charity, he should apply to the IRD for tax exemption and subject to approval according to IRO. More details can be seen under the section of registration of charity organization.

Source of Income

The principle generally includes profits subject to Profits Tax which meet the preconditions as follows:

  • The entity trades within Hong Kong; and
  • The income arise from such a trade; and
  • The profits arise in or be derived from Hong Kong

Therefore, no effect is made between residents and non-residents. A Hong Kong resident may therefore derive profits from abroad without being charged to tax. On the contrasts, a non-resident may be chargeable to tax on profits which is derived in Hong Kong.

The question of “Are my business profits derived from Hong Kong?” are largely depending on 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.

Regarding tax assessment of “source of income”, it has been generally defined as the geographical location of a entity’s operation which substantially rise its income, a few aspect of consideration gives more precise criteria:

  1. Location of a sales contract being negotiated and executed:

    It is the most important question “Where was the physical place where a sales contract was negotiated and signed?”. Here is 2 scenario which can help to explain the key factors of consideration.

    • This income is deemed as Hong Kong source income for profits tax purpose: Income raised by a sale contract was negotiated by a seller in the Hong Kong territory to a buyer who is outside the territory by way of electronic communication or telecommunication (e.g. e-mail, messaging services, teleconference, facsimile or telephone) so that the negotiation did not require travel outside the territory.
    • This income is NOT deemed as Hong Kong source income for profits tax purpose: A contract was negotiated and signed outside Hong Kong territory and the goods sold was not sourced from within the territory.
  2. Center of bookkeeping:

    The income from below a transaction is not deemed Hong Kong source income: When a Hong Kong business entity is merely acting as bookkeeping center of the contract, so that this entity takes part in neither negotiation nor draft of the sale contract to be carried outside the territory of Hong Kong. The Hong Kong entity is solely for issues of invoice on instructions, bank account operation and accounting records maintenance covering the transaction.

  3. Shares & Securities:

    The incomer from selling shares and securities purchased and sold in the Hong Kong territory’s stock exchange are deemed Hong Kong source income for profits tax purposes: The entity regardless of the nationality and jurisdiction of incorporation is subject to profit tax on such an activity.

  4. Cross Border Land Transportation:

    Income from providing cross-border land transportation services is deemed Hong Kong source income: When the passengers or goods are normally uplifted in Hong Kong, and transported outside Hong Kong.

  5. Loans:

    The interest earned from a loan lent to somebody in jurisdiction outside Hong Kong is not deemed as Hong Kong source income:  A person or organization that lends money and receive loan interest from it made available to the borrower within the jurisdiction of Hong Kong is deemed to be Hong Kong source income for profits tax purposes and taxable in the hands of the Hong Kong lender; However, loan interest on a loan made available to the borrower in a foreign jurisdiction is not deemed Hong Kong source income and is therefore not taxable.

  6. The establishment of an office in Hong Kong:

    It is not relevant to consideration of source of income:  When the office is not generating profits from within Hong Kong territory, thus this company is not liable to profits tax.

Tax efficiency approach is often achieved by utilizing a Hong Kong company to register as foreign company in an offshore jurisdiction whose directors are non-resident of Hong Kong, then a sales contract is negotiated and executed from this offshore jurisdiction.

Period of Assessment

Only a registered business that has been running on for at least 1 year is subject to assessment, the basis period of assessment for this business is either one as follows:

  • the period of the year of assessment if the annual accounts ends on 31 March; or
  • the accounting year that ends in the year of assessment if the accounts ends on a day other than 31 March;

Date of Business Commencement

The date of business commencement may affect the deductibility of expenses for assessment purpose, although all expenditures to set up a business should be capitalized by accounting principle adopted in Hong Kong. IRD may by concession allow deduction for revenue expenditure like office rent and staff salaries in priority to the business commencement.

IRD usually adopts without queries the date which is submitted by the business owner to Business Registration Office (an office within IRD) to be its registered date of business commencement (For a Hong Kong incorporated body, this date is usually the same as its recorded incorporation date since incorporation and business registration are processed at the same time automatically by the Hong Kong government). Indeed, this date is largely a question of facts, the following considerations are taken when this is not easy to be determined:

  • For retail business, the date when goods are first offered for sale.
  • For manufacturing, the date when the production begins.
  • For property development, the date when any preparation works begin e.g. appointment of an architect.

Date of Business Cessation

Similar to business commencement, date of business cessation is largely a question of facts. Generally, IRD adopts the day declared as such in notification to Business Registration Office is made. Whether a business ceases or not depends on the circumstances each case, IRD may look at any actions are done to close down the business including death of a sole-proprietor, disposal of stock without replenishment of a body incorporate.

The change of accounting date of an accounting year

At least one of the following must take place within  a year of assessment to apply for change:

  • there are two sets of accounts ending within one year of assessment; or
  • accounts are not made up to the old accounting date.

That year of assessment is called the year of change. In practice, IRD takes a 2-head approach on assessment:

  • assess all the profits throughout the business life as far as possible
  • assess from the new accounting date as soon as possible.

Tax Rates

In the current Year of Assessment (2008/09 onwards), Profits Tax rates applied to corporations, unincorporated businesses and non-resident entertainers and sportsmen are not the sames, details are as follows:

  • Corporations (i.e. Company): 16.5% flat rate
  • Unincorporated Businesses (i.e. Sole-Proprietorship and Partnership): 15% flat rate
  • Non-Resident Entertainers and Sportsmen: 15% ~ 16.5% flat rate
    • The Hong Kong payers must retains 10% ~ 11% flat rate of total gross amount payable for tax payment

Concessionary rate

50% of the normal profits tax rate will be applied to trading profits and interest income received or derived from qualifying debt instruments issued in Hong Kong, and to the offshore business of professional reinsurance companies.

Assessable Profits

First of all, we have to understand what is the official meaning of “Profits”. However, IRD does not includes solid definition of “profits” in their material but it based on numerous court cases. Generally, we define profit as the normal business practice: profit means the net profit, or the net gain, or the surplus of incomes over expenses. To understand and to determinate the incomes and expenses of a taxable person is critical to calculate profits.

Secondly, we have to understand which items of profits are “Assessable”. Traditionally, we takes Accepted Accounting Principles (GAAP) to prepare business accounts, thus Assessable Profit are accounting profits or GAAPs. The principle are changing from time to time because of ever-changing business environment, discussion is happening. Besides, the Hong Kong Institute of Certified Public Accountants (HKICPA) issues Statements of Standard Accounting Practice to standardize the accounting treatments of various topics of importance, the fundamental importance.

Principle of good concern

Accountants assume that the business will go on in the foreseeable future when preparing the business accounts.

Principle of accrual or matching

Accountants take expenses incurred but not yet paid for into account for profits computation, and carry the expenses paid for future accounting periods  forward to match the related future revenue and thus this expense should not be deductible the current-year profits calculation.

Principle of revenue versus capital

  • Profit and Loss Account includes incomes or gains of a revenue nature and thus taxable.
  • Capital reserves receive credit from incomes or gains of a capital nature and thus not taxable.
  • Profit and Loss Account recognize expenses or losses of a revenue nature and thus deductible.
  • Expenses or losses of a capital nature,  although they may be deductible in accounting profits computation are thus not deductible.

Taxpayers are likely to claim more incomes to be capital in nature (i.e. on-taxable); and the Revenue will treat more losses of a capital nature (i.e. non-deductible) practice. Finally, IRO makes a specific provision for a topic, such provision will over-ride the accounting principle or the general commercial practice of that topic.

Example of Assessable Profits deemed by IRO

  • Money received or receivable from the exhibition or use in Hong Kong of cinematography or television film or tape, any sound recording or any advertising materials connected with such film, tape, or recording.
  • Money received or receivable for the use or right to use in Hong Kong a patent, design, trademark, copyright material or secret process or formula or other of a similar nature.
  • Money received or receivable for the use or right to use outside Hong Kong a patent, design, trademark, copyright material or secret process or formula or other of a similar nature if the payment for such are deductible under profits tax.
  • Money received or receivable by or accrued to a person carrying on business in Hong Kong by way of grant, subsidy or similar financial assistance other than sums in connection with capital expenditure.
  • Money received or receivable by way of hire, rental or similar charges for the use of movable property or the right to use movable property in Hong Kong.

Capital Gain v.s. Revenue Gains

Generally,  it is an accepted accounting practice that capital income should not be included in trading profits, IRO also exempts profits arising from the sale of capital assets.

A number of court cases had been raised regarding the distinction between income from “fixed capital” and income from “circulating capital”. We refer the former to “capital receipts” and the latter to “revenue receipts”.

From case laws, “fixed capital” is the the capital which owner turns to profit by keeping it in his own possession; In practice, land and buildings, plant and machinery, long-term leases and goodwill are “fixed capital”,  which are retained and used in the business and they form part of the permanent structure of the business. As a result, any receipt from their sale, or compensation for their loss or damage, are capital receipts and non-taxable.

One the other hand, “circulating capital” is what owner makes a profit by parting with it and letting it change masters. In practice, an asset forms part of the “circulating capital” when it is acquired in the ordinary course of business (the capital is to be sold, or to be manufactured for goods to be sold) such as trading stock and raw materials. As a result, any receipt related to such items are revenue receipts and taxable.

It is important to understand the definition of Profit, Revenue, and Capital, it is advisable to understand them as follows:

  • Profit:
    The gross proceeds of a business transaction less the costs of the transactions; Excess of revenues over expenses for a transaction; Gain realized from business or investment over and above expenditures.
  • Revenue:
    Return or yield;
  • Capital:
    Accumulated goods, possessions, and assets, used for the production of profits; In accounting, the amount invested in a business.

Receipts or Profits qualified for Exemption from Assessable Profits

The following receipts or profits are exempt from the assessable profits:

  • Dividends received from a corporation
  • Profits already assessed to Profits Tax in name of other persons such as partnership
  • Interest on:
    1. tax reserve certificates
    2. bonds issued under the Loans Ordinance or the Loans (Government Bonds) Ordinance
    3. Exchange Fund debt instruments
    4. Hong Kong dollar-denominated multilateral agency debt instruments
    5. a deposit with a bank (this exemption does not apply to the bank itself).
  • Sums accrued to an authorized mutual fund corporation or an authorized unit trust by way of:
    1. interest
    2. gains or profits arising from the sale or other disposal or on the redemption on maturity or presentment of securities
    3. gains or profits under foreign exchange contracts or futures contracts.

Deductible Allowance from Assessable Profits

  • Specific portion of contribution (or provision for a contribution) by an employer under the Recognized Occupational Retirement schemes (ROR schemes).
  • Specific portion of contribution to Mandatory Provident Fund scheme (MPF schemes) by an employer.
  • Specific portion of recognized charitable donations made to approved charitable institutions in Hong Kong.
  • Property Tax already paid.
  • Depreciation allowances for capital equipment are as follows:
    • 100% first year allowances for manufacturing plant and machinery;
    • 100% first year allowances for computer equipment specially related to manufacturing;
    • 60% of the cost of all other plant and machinery can be written off in the first year with a rate of 10-30% written off thereafter.
  • 20% of the cost of construction of an industrial building can be written off in the 1st year with 4% per annum thereafter.
  • Expenditure incurred refurbishing or renovating business premises can be written off in 5 equal installments.
  • 20% of the cost of construction of an industrial building can be written off in the 1st year with 4% per annum thereafter.

Deductions for Assessable Profits

Employee and/or Director’s remuneration

In the tax return, “employee” is referred to all employees whose remuneration has been included in the Profit and Loss Accounts of the company, regardless of the situation that the employees perform their duties in Hong Kong or not. i.e. Remuneration paid by employer to employees staff working in the Mainland China or overseas are counted.

For a corporation (incorporated body), its director is also an employee. However, “employee” does not include a proprietor or partners or their spouses of an unincorporated business.

Remuneration is the sum of all form of salaries, bonuses, wages, cash allowances and etc. which are paid to employees and includes director’s fees.

Fringe benefits such as reimbursement of rent for living quarters, reimbursement of traveling expenses, share options granted, passages, medical expenses and etc. should not be added unless these expense have been grouped under “employee remuneration” and accounted on the Profit and Loss account of the company.

Deductions for MPF contributions made by employers for their employees

Regular/monthly contributions (whether mandatory or voluntary) made to a MPF scheme by persons as employers for their employees are allowable for deduction. The deduction is limited to 15% of the total remuneration of employees of the assessment period.

For sole-proprietorship and partnership firm, the owners / partners (as a self employed person) can deduct its  mandatory contribution from assessable profit.

The Inland Revenue Department is prepared to accept, in the absence of legal precedent to the contrary, the priority of the income deduction for making mandatory contributions to a registered MPF scheme over the income deduction for paying default tax.

Obligation of Keeping Business Records

Every person carrying on a trade, profession or business in Hong Kong must keep sufficient business records, either in English or Traditional Chinese, for income and expenditure so as to ensure his Assessable Profits to be ascertained by IRD. The business owner must keep those records for at least 7 years, business records should  include the following:

  • books recording receipts and payments, income and expenditure;
  • original documents such as vouchers, bank statements, invoices, bills, receipts etc;
  • books recording assets and liabilities;
  • books recording daily cash receipts and cash expenditures;
  • where the business involves dealing in goods –
    • a record of all goods purchased and all goods sold showing date of transactions, the goods concerned, the suppliers, the customers;
    • a record of trading stock at the opening and also at the end of the accounting period and details of the stocktaking for preparation of the stock record;
  • where the business involves the provision of services, records must show date of transactions, the services content and the customers.

Claim of Profits Tax Exemption

In accordance with the “territorial source principal“, only profits arising in or derived from Hong Kong are chargeable to Profits Tax. Therefore, Profits derived from or sourced from other geographical location outside Hong Kong are not taxable i.e. Profits from tax. Utilizing this principle, the business entity is legal to arrange its profit exempted from Profits Tax payment.

Income from trading

To determine weather the income source is derived from Hong Kong or not, Inland Revenue Department considers the nature of activities that the business has done to earn the profits and where the activities have been done. When the sales contracts are initially negotiated, concluded and subsequently executed outside Hong Kong, there are grounds to claim the trading profits as offshore sourced income and non-taxable.

Income from service

When services performed by a business entity is done physically outside Hong Kong, the profit generated from these services can be claimed as offshore sourced income and non-taxable. The residence of business owner and location of incidental activities performed before or after the income is earned are generally considered as irrelevant.

No Withholding Tax in Hong Kong

In Hong Kong, the government has no withholding taxes in assessment of Profits Tax, but exemption are available when a company making payment to a foreign associate (either subsidiary or holding company) so that the payment is deemed to be Hong Kong source income and needs to withhold the tax.

Treatment of Losses

In an accounting year, losses are to be carried forward and set off against future profits of that trade, an incorporated business entity carrying on more than one trade may arrange losses in one trade to offset against profits of the other. However, for gains or losses which are subject to concessionary tax rate, there are special provisions on the adjustment of losses between concessionary trading activities and normal trading activities.

For an individual taxpayer, claiming Personal Assessment on tax assessment is allowed to put the loss allowed a a deduction from total income.

Provisional Profit Tax

It is neither other type of nor special form of Profits Tax, it is a method of assessment on profits.

Since Profits Tax is chargeable on the assessable profits for each year of assessment, the assessable profits for any particular year is unable to know until after the end of the year, a provisional tax charge has to be raised – IRD charges the tax on the estimated profits before the true amount of profits are known. When the assessable profits for the year of assessment are finally known, an assessment will be made and the provisional profits tax paid will be utilized to offset the tax liability under the assessment.

Holding Over of Provisional Tax

An application, in writing for holding over of the whole or part of the provisional profits tax on the following grounds as specified in the IRO, can be made, whichever is later, either 28 days before the due date for payment of the provisional tax, or 14 days after the date of issue of the notice for payment of the provisional tax.

Taxpayer’s assessable profits for the year of assessment are likely to be less than 90% of the assessable profits for the year preceding the year of assessment (or 90% of the estimated sum) with respect to provisional tax liability. It is a must to provide supporting documents including properly signed draft accounts covering a period of not less than 8 months for the application. The amount of loss which is brought forward for set off to that year of assessment is wrong.

For an individual, the taxpayer has already stopped or going to stop (before the end of the year of assessment) carrying on trade, profession or business. The assessable profits for that year of assessment are likely to be less than the assessable profits for the year preceding the year of assessment (or of the estimated sum) with respect to provisional tax liability. Personal Assessment, which is likely to reduce tax liability) was claimed for the year of assessment for which provisional tax was charged.

Objection to your assessment for the latest preceding year of assessment profits tax is made, and provisional tax was charged.

Objection and Appeal

Taxpayer must lodge a written notice of objection with the Inland Revenue Department within one month after the date of issue of the tax assessment. In the notice, the grounds for your objection must be stated clearly.
When the notice is against an estimated assessment because of failure to lodge a return, a properly completed tax return coming with the accounts must also be submitted with the notice of objection.
Since the Commissioner of the IRD may impose a surcharge on any tax charge not settled by its due date, when the taxpayer’s objection is under investigation are awaiting the ultimate settlement of the objection, the sum indicated on the demand note or the estimated tax amount advised by assessors should be pay.
If the IRD determination cannot satisfy the taxpayers, they may further lodge an appeal against the determination to the Board of Review (a Inland Revenue Ordinance) which is an independent tribunal. Every appeal must be made in writing to the Clerk to the Board of Review (Inland Revenue Ordinance) within one month of the date of issue of the IRD’s written determination.

Arrangement of Profits Tax for Non-residents of Hong Kong

The basic principle of taxation in Hong Kong:  Every person carrying on a trade, profession or business in Hong Kong — who has profits arising in or derived from Hong Kong — is chargeable to Profits tax. Therefore, profits tax applies to BOTH Hong Kong residents and non-residents.

Profits tax may be levied on the non-resident either directly or indirectly:

  • Direct: assessed in non-residents’ own name, or
  • Indirectly: assessed on “agent(s)” of the non-residents

According to IRO, “agent” includes but not limited to following:

  • the agent, attorney, factor, receiver or manager in Hong Kong
  • any person in Hong Kong through whom the non-resident is in receipt of any profits arising in or derived from Hong Kong.

The tax are recoverable from the non-resident or the agent in Hong Kong.

Agents are required to withhold an adequate amount from the non-resident’s assets within his control for tax payment. Moreover, the agent can object to the assessment on behalf of the non-resident.

Arrangement of Profits Tax for Non-resident Entertainers and Sportsmen in Hong Kong

The Definition of “Entertainer or Sportsman”

Stated in the IRO,“Entertainer or Sportsman” refers to an individual person, excluding a business, offers performances (of one or a group), demonstrating the function of entertaining or being a sportsman, in a live or record form, which allows the public to see or hear with or without any payment.

In brief, completing Form IR623 denying money is what the Hong Kong taxpayer need to do for meeting the tax payment.

Case Study

Case A: Company G, which is a Hong Kong Company, discussed with a non resident entertainer and arranged him directly to perform in Hong Kong on 28 July for the total amount of $240, 000 Hong Kong dollars. The tax of the non-resident entertainer will not be borne by Company G. The gross amount payable is $240,000 minus the deduction for expenses ($80, 000) is the amount of assessable profits ($ 160,000). Tax payable is (15% from 2008/09 onwards) $24,000.

Case B: If Company G is not the one making direct contract with the entertainer, but through the non-resident corporate agent of the entertainer .High rate (16.5% from 2008/09 onwards) is charged. Tax payable is (16.5% of assessable profit ($160,000)) is $26,400.

Arrangement of Profits Tax for Hong Kong Partnership Firms

Usually, the precedent partner, first named in the partnership agreement or in the usual partnership name or in any statutory document, is responsible to file a Profits Tax Return. If there is no such agreement. However, every partner is jointly and severally liable to handle the tax liability and obligation.

To complete a tax return, it must be supported the document as follows:

  • a certified copy of audited Accounts;
  • a tax computation showing how Assessable Profits are calculated from the accounting profits;
  • a schedule showing allocation of Assessable Profits between partners;
  • a schedule showing how any salaries payable to partners, and balance apportioned in their profit and loss sharing ratio;
  • mandatory contributions made to the Mandatory Provident Fund Schemes of all partners;
  • capital expenditure incurred, capital assets sold, depreciation charged in the accounts and assets not in use at the end of the basis period;
  • expenditure incurred on, and disposal proceeds of, scientific research;
  • expenditure incurred on refurbishment of buildings — the location and the usage of building during the year;
  • the bad debts written off and provided for including the name of debtors and reasons therefor;
  • any service / management fee received including name and address of each payer;
  • interest paid or payable, including name and address of the lender, any security to the lender, and the usage of the loan;
  • income claimed to be with a non-Hong Kong source;
  • the name and address of payments involving contractor / sub-contractor fees, management fees, commission, royalties, legal and other professional fees, and hiring charges for the use of a movable property in Hong Kong;
  • bad debt provisions and write-offs;
  • change in valuation of stock; and
  • rent payments including name and address of the landlord, the property location, the total rent paid and the period covered.

Basic of Assessment for a partnership firm

For Profits Tax assessment purposes, a partnership is treated as a separate legal “person” so that the assessable profits of a partnership are calculated as a single amount and the tax liability in respect of the profits is charged in the name of the partnership.

Personal Assessment as tax relief of the partner

Normally, a Profits Tax assessment levied on the partnership charges the standard rate. However, if the partner elect Personal Assessment, the partners’ tax liabilities may be reduced.

It is because IRD assess a partnership firm for profits tax purpose instead of every partner, the income of partners from this firm can be assessed via Personal Assessment to obtain personal allowance and deduction to obtain reduced tax liabilities.

Share of Assessable Profits and Relocation of Shared Loss among partners

The allocation of the assessable profits (or adjusted loss) among partners takes into account of any salary, interest on loans or capital invested which has been paid to a partner. Such a payment is treated as a distribution of profits to the partner concerned so that the balance of the assessable profits is then apportioned on the basis of the agreed profit sharing ratio.

Assume:

  • a partnership firm has 2 registered partner – A and B
  • their agreed sharing ratio is 1:1
  • Assessment Profits of the firm: $500,000

Case 1: Partner A takes $150,000 as salary

Remaining Balance: Assessment Profits – Salary paid to Partner A ($500,000 – $150,000) = $350,000

Then, Allocation of Assessable Profits between Partner A & B:

Partner A & Partner B respectively share of remaining balance: Remaining Balance x 0.5 ($350,000 x 0.5) = $175,000

Share of assessable profits by Partner A: Partner A share of remaining balance + Salary paid to Partner A ($175,000 + $150,000) = $325,000

Share of assessable profits by Partner B: Partner B share of remaining balance + Nil ($175,000 + 0) = $175,000

Overall, both Partner A & B are in a profitable position of the firm, Partner A is in the position of heavier tax liability

Case 2: Partner A and B takes $150,000 and $350,000 as salary respectively

Remaining Balance: Assessment Profits – Salary paid to Partner A & B ($500,000 – $150,000 – $350,000) = $0

Then, Allocation of Assessable Profits between Partner A & B:

Partner A & Partner B respectively share of remaining balance: Remaining Balance x 0.5 ($0 x 0.5) = $0

Share of assessable profits by Partner A: Partner A share of remaining balance + Salary paid to Partner A ($0 + $150,000) = $150,000

Share of assessable profits by Partner B: Partner B share of remaining balance + Nil ($0 + $350,000) = $350,000

Overall, both Partner A & B are in a profitable position of the firm, Partner B is in the position of heavier tax liability

Case 3: Partner A takes $600,000 as salary

Remaining Balance: Assessment Profits – Salary paid to Partner A & B ($500,000 – $600,000) = -$100,000

Then, Allocation of Assessable Profits between Partner A & B:

Partner A & Partner B respectively share of remaining balance: Remaining Balance x 0.5 (-$100,000 x 0.5) = -$50,000

Share of assessable profits by Partner A: Partner A share of remaining balance + Salary paid to Partner A (-$50,000 + $600,000) = $550,000

Share of assessable profits by Partner B: Partner B share of remaining balance + Salary paid to Partner B (-$50,000 + $0) = -$50,000

Overall, only Partner A is in a profitable position of the firm, the loss of Partner B will be completely shifted from Partner B to Partner A.

After allocation of loss, their share of assessable profits are as follows:

Partner A: Share of assessable profits by Partner A – Loss from Partner B ($550,000 – $50,000) = $500,000

Partner B: Share of assessable profits by Partner B + Relocation ($-50,000 + $50,000) = $0

Incurred loss in preceding year of assessment

Where an individual incurs a share of a loss in a business carried on by a partnership and does not choose personal assessment for for that year of assessment, the amount may be carried forward and set off against his/her share of the assessable profits from the partnership business in subsequent years of assessment until it is fully set off.

However, any remaining balance of the loss lapses if the partner retires before the loss is fully set off, i.e. the balance cannot be utilized to reduce the subsequent profits of the partnership.

Partners having a Separate Employment

These partners have made their mandatory contributions for a MPF scheme from both as a self-employed person and as an employee, the aggregate amount of contribution from these others’ other employment to be deducted for that partner should not exceed $12,000 in any year.

Arrangement of Profits Tax for Hong Kong Limited Company (Corporation)

IRO requires every business to keep sufficient business records.

From the view of IRD, A corporation is any company incorporated or registered under any enactment or charter in Hong Kong or elsewhere. The question of whether the corporation is a resident or a non-resident of Hong Kong does not normally affect its profits tax liability (although special provisions applicable to non-residents concerning collection of tax).

A corporation carrying on a business in Hong Kong has to file a tax return for every year of assessment.

In order to avoid excess tax liabilities, directors should prepare the accounts of the company as soon as possible and hand to the auditor for preparation of audit report. A newly incorporated company can prepare its first audit report within 18 months of its incorporation.

The tax return must be supported by the following:

  • a certified copy of audited Balance Sheet and Profit and Loss Account and Director Report;
  • a certified copy of Auditor Report;
  • a tax computation showing how the Assessable Profits are computed from the accounting profits;
  • schedules of the following items (where applicable):
    • capital expenditure incurred, capital assets sold, depreciation charged in the accounts and assets not in use at the end of the basis period;
    • expenditure incurred on, and disposal proceeds of, scientific research;
    • expenditure incurred on refurbishment of buildings — the location and the usage of building during the year;
    • reserves and provisions, showing transfers to and from the related accounts;
    • extraordinary gains and losses;
    • any service / management fee received including name and address of each payer,
    • interest paid or payable, including name and address of the lender, any security to the lender, and the usage of the loan;
    • income claimed to be with a non-Hong Kong source;
    • the name and address of payments involving contractor / sub-contractor fees, management fees, commission, royalties, legal and other professional fees, and hiring charges for the use of a movable property in Hong Kong;
    • bad debt provisions and write-offs;
    • change in method of valuation of stock; and
    • rent payments including name and address of the landlord, the property location, the total rent paid and the period covered.