10 Smart Tips to HK Profits Tax Calculation & Savings
Taxation is the red-hot theme among Hong Kong company owners since the Hong Kong Inland Revenue Department (the tax authority of Hong Kong) has been rolling out the Tax Return letters to taxpayers starting this April.
If you own a Hong Kong company, you have to file the tax returns, which are:
- Profits Tax Return and Employer’s Return, on behalf of your registered business as a corporate taxpayer
- Salaries Tax Return, on behalf of yourself as an individual taxpayer
Whether you have filed the returns or not, it’d be helpful to revise the essential of the Hong Kong tax system and its latest changes to maximize your savings in tax.
Just a Kind Reminder :
Although there is no requirement to Hong Kong company to hire an accountant nor a tax representative to prepare for the financial statements and tax returns, according to the Companies Ordiancne Section 373, A company MUST keep accounting records. If A director of a company who fails to take all reasonable steps to secure compliance , he/she commits an offence and is liable to a fine of $300,000.
In addition, according to the Inland Revenue Department (IRD) the Profit Tax return must be submitted TOGETHER with the Tax Computation (Form BIR51) and the “audit report” ( such report must be presented in compliance to the Hong Kong Financial Reporting Standard, be audited by an independent Hong Kong Certified Public Accountant with Practising Certificate), which is a collective term comprising audited accounts and auditor’s report. AsiaBC is capable of offering accounting service and tax representative service for both corporate and individual clients, feel free to contact us for consultation.
1. Due Date of Profits Tax Return Is Varying per HK Company
Every Hong Kong company is free to select its business year end date in any Year of Assessment (Y/A). Comparing with that of Hong Kong Salaries Tax, the basis period is the same as the period of Y/A, which starts from 1 April to 31 March of the following year.
e.g. the Y/A 2022/23 is a period from 1 April 2022 to 31 March 2023.
The IRD decides your company’s tax basis period according to your company’s fiscal year end-date (commonly known as “accounting date” in Hong Kong), which can be any calendar date. A basis period should cover 12 calendar months^.
e.g. If the Account Date is on 30 June, the basis period is covering a period from 1 July to 30 June of the following year.
The return is required to be filled and returned within one month. However, different fiscal year end-date may result in separate filing due dates, the due date for Y/A 2021/22 is as follows (source):
|Accounting Date falling between the period of:||Filing due date Y/A 2022/23:|
|1 April to 30 November||17 May 2023 (with extension)|
|1 December to 31 December||15 August 2023 (with extension)|
|1 January to 31 March||15 November 2023 (with extension)|
In the future, you may apply to change the Accounting Date on the second tax return and so on, but you need to give strong reasons for the IRD’s consideration.
For some companies, the Profits Tax basis period is not equal to 12 months but it is still valid when in the following scenarios:
- the newly incorporated company files its first tax return
- the company chooses its Account Date on Lunar Calendar
- the company changes its Accounting Date
- the company will cease to do business before or after its Accounting Date
2. Director’s Salaries Are Taxable for Salaries Tax of the Director
Whether or not the Hong Kong company’s director has a presence in Hong Kong or engagement into the Hong Kong company’s management, any fees and benefits paid by the company to the director are chargeable to the director’s Salaries Tax.
In addition to the directors, other company’s officers such as managers and statutory company secretaries, are also under the same regulatory of Salaries Tax no matter the person is or is not a Hong Kong resident.
This ruling can prevent the company from avoiding Profits Tax by shifting its profits to the expense of remuneration since the director is likely to be the beneficiary of the company.
No worry of doubling taxing on the salaries expense, it is because the payment of the directors’ fees is deductible from the company’s assessable profits.
With the Profit Tax rate is down to 8.25% on the first HK$2M profit and HK$20,000 tax deduction per company, it’s a big tax saving for every Hong Kong company.
3. Dividend Paid Out to Shareholders Must be Withdrawn After the Profits Tax
In other words, the company’s dividends paid out is not deductible from assessable profits. On the other hand, the dividends received by the shareholders are not chargeable to the shareholders’ Salaries Tax in Hong Kong.
However, if the shareholders are tax residency of other countries, the dividend may be chargeable there is capital gain and raise the issues of Double Taxation
Some countries exercise international taxation regime, if you are their tax resident, you are taxed no matter where you source the income.
As a result, from the perspective of the overseas company owners, the Hong Kong company prefers employee’s remuneration to dividends for capital withdrawal from the company, provided that Hong Kong offers the advantageous basic allowance to every individual taxpayer.
4. Provisional Tax Applies to All Income Taxes
Let’s take Profits Tax and Salaries Tax for reviewing Provisional Tax. The moment you receive your tax demand note of the preceding Y/A, you should be surprised by a payment named Provisional Tax, which sounds to demand for the tax of “unearned income” estimated to be generated in the current Y/A. What’s more, the demanded Provisional Tax payment is 100% of your computed tax burden in your preceding Y/A.
E.g. if your company have reported the assessable profit in 2022/23, you will receive the demand note of payment for Profits Tax on this profit in 2023/24, which demands for the final Profit Tax and Provisional Tax, both tax amounts are equal.
You feel unfair that you are charged on the non-existing income that you have not yet earned. However, it is a common misunderstanding about how the Provisional Tax works.
If you look closer at the demand note, first, the payment due date of Provisional Tax comes later than that of final tax, which will be due in one month. Second, the sum of Provisional Tax payment is separated into two sub-payments of 75% and 25%. Third, the 75% sub-payment will be due in around nine months after the start date of your accounting year while the remaining will be due in 12 months afterwards. Therefore, the IRD collects the Provisional Tax of current Y/A after you are supposed to have earned the income by the time of collection.
Then, if the Provisional Tax you paid exceeds the final tax assessed in the same period, the excess is applied against the Provisional Tax payable for the succeeding year.
You can think of the Provisional Tax as the pre-paid credit of your tax.
There are some grounds for the holdover (delay of collection) of Provisional Profits Tax, such as:
- Your calculated assessable profits for the current Y/A are likely to be less than 90% of the assessable profits for the preceding year.
- You have ceased or will cease before the end of the Y/A to carry on your business.
5. Some Business Incomes Are Not Taxable
Officially, the “assessable profits” are the net profits (or losses) for the tax basis period, arising in or derived from Hong Kong and calculated under the Inland Revenue Ordinance, so the IRD considers the receipts arising from day to day business operations as chargeable. Besides, the income closely linked to your business nature and activity is also liable to the Profits Tax, such as:
- Rental income received from the sub-letting part of your business premises
- Rebates earned from trade associates;
- Forfeiture of trade deposits or financial compensation from customers arising from the cancellation of ordinary business contracts;
- Trade debts that were claimed irrecoverable, and deducted from the previous years’ assessable profits, but which have subsequently been recovered from customers;
- Grants and subsidies (unrelated to capital expenditures) you received from the Government or other parties;
- Rental for the hiring of your computers, equipment and machines;
- Sums for the use or right to use in Hong Kong of a patent, design, trademark, copyright material or a secret process/formula received by you; and
- Sums received for the transfer of a right to earn income.
As a result, the income arising from out of the daily business operation generally are non-taxable (provided that the income is not deemed for making revenue in-nature by the IRD):
- Proceeds from the sale of fixed/capital assets;
- Proceeds from the sale of business interests/goodwill;
- Compensation for early termination of business tenancies;
- Dividends from corporations subject to Profit Tax separately;
- Amounts already included in the assessable profits of other persons chargeable to Profits Tax; and
- Interest income from bonds and funds.
6. Not Every Business Expense Is Deductible
The general rule to tell if an expense is whether the cost is related to your day-to-day business operations. The IRD has a general guideline to include particular expense as deductible. The following expenses are safe to report as deductible income:
- Rents paid on business premises/quarters for employees;
- Light, water and telephone charges for business premises;
- Salaries, wages, allowances and bonuses for the employment;
- Employer’s mandatory and voluntary contributions to MPF schemes or MPF-exempted Recognized Occupational Retirement Schemes (but the deduction is limited to 15% of the total emoluments of the employee for the period to which the payments relate);
- MPF mandatory contributions as a self-employed person for the sole proprietor or partner, not exceeding $18,000 per year per person for the year of assessment 2015/16 and onwards;
- Severance payments paid at the termination of employment;
- Interest on funds borrowed for normal business operations, such as for the purchase of stock (but must satisfy the conditions laid down in section 16(2) of the Inland Revenue Ordinance);
- Bad or doubtful debts (i.e. recognized sales but for which you cannot collect payments from customers);
- costs of repairing articles, premises, machinery and plant used in producing profits; and
- Approved charitable donations of not less than $100, but not exceeding 35% of your assessable profits.
However, the following expense and payment are not deductible given the IRD’s perspective:
- Any loss of capital;
- Any withdrawal of money;
- Any expenditure of a capital nature (e.g. purchase fixed assets);
- The costs of any improvements;
- Rent or expenses relating to premises not occupied to produce assessable profits;
- Any sum recoverable under insurance or contract of indemnity;
- Taxes paid under the Inland Revenue Ordinance(except Salaries Tax paid in respect of employees’ remuneration);
- Domestic or private expenses, including medical costs, insurance premiums, birthday celebration expenses for the sole proprietor/partners and their family members;
- Travelling between residence and place of business;
- Traffic penalty incurred during the delivery of goods to customers; and
- Any sum not expended to produce assessable profits.
7. Allowances to Profits Tax Is Limited to Specific Business Nature
In Profits Tax regime, the only allowance that the taxpayers may enjoy is “depreciation allowances”, which is restricted to manufacturing and construction businesses in nature. Namely, they are:
- Industrial Building Allowances on Industrial Buildings and Structures
- Commercial Building Allowances on Commercial Buildings and Structures
- Plant and Machinery for manufacturing industries
8. The Locality of Profits Is Hard to Tell in the Era of Borderless Commerce
Under the Inland Revenue Ordinances (IRO), it clears that only profits arising in or derived from Hong Kong are chargeable to profits tax. The residence of a taxpayer is not relevant. To test if a profit fulfils the definition, it must satisfy the three condition as follow:
- The person must carry a trade, profession or business in Hong Kong;
- The profits to be charged must be from such trade, profession or business carried on by the person in Hong Kong; and
- The profits must be arising in or derived from Hong Kong.
Since whether an income is deemed as “Hong Kong’s income” is debatable, we should take a look at the IRD’s general tax guide to the territorial source taxation. In addition, you can refer to the IRD’s in-depth technical note about the locality of the profit, which provides legal cases and corresponding clarifications to the IRO.
To support your claim of non-Hong Kong sourced income, at least the whole of the business operations are carried out outside the Hong Kong border.
9. The Deficit Is Favourable to Tax Saving
The loss can be carried forward for set off against the future profits of your business.
10. If Wanting to Pay Tax in HK, Get Yourself Prepared for the Tightened Ruling
What has been changed here is the tightened regulatory under the matters about tax exemption of “offshore income (the income raised outside Hong Kong)“, to fight against economic crime related to profit shifting commonly deployed by the multinational enterprises.
Hong Kong companies are so simple to set up that they are at risk of misuse by criminals to conduct profit shifting (also known as transfer pricing, by moving the income generated from high-tax rate jurisdiction to low-tax rate one for the avoidance of tax).
Therefore, the IRD has changed their practice starting from 2018 requires that, when you make a tax exemption claim to the IRD for your offshore corporate income, you also have to provide tax proof for the Hong Kong IRD’s consideration, in which this income is going to be or have been taxed in other jurisdictions, e.g. your tax residency country. On the other hand, if you transfer the profits from offshore to your Hong Kong companies to report it as “Hong Kong profit”, the IRD requires you to provide the proof of business controlling matters taking place in Hong Kong, to fight against the use of Hong Kong as a low tax shelter.
From our understanding, the grounds to claim offshore income exemption status are as follows:
- The control and management must be carried outside of Hong Kong.
- The company’s headquarters is located outside of Hong Kong, having long-term office and local staff there is a critical factor.
- Explain with proof that why the business must be carried out by a Hong Kong company rather than a company in the home country or country that the profit is sourced.
In Hong Kong, claiming offshore income tax exemption status requires collective works of expertise with knowledge and experience of taxation and business accounting. Simply seek help from AsiaBC, our 4-in-1 tax and accounting service is your gateway to successful offshore claim in Hong Kong. Contact us now for a free initial consultation.