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Filing profit tax returns in Hong Kong in 2022: Know about tax incentives, deductions and more

10 minute read

It is that time of the year again – when you need to take a break from what you do and understand the nitty-gritty of filing taxes for your company. For most entrepreneurs, this is NOT something they look forward to at all, which is why at Sleek we do all we can to help you get through this period with high efficiency and consistent support.

If you are wondering what corporate tax means, and if your business needs to pay some this year, then xxxxx (article above) lists down all the details around the hows and whys of the corporate taxation system in Hong Kong.

Overview:

Filing profit tax returns in Hong Kong

The Inland Revenue Department (IRD) sends Profit Tax Return forms to companies operating in Hong Kong every April.

The date of issuance can be found on the first page of the tax return form. A request for an extension may be granted if the form cannot be submitted within one month (the deadline). Companies can also opt to file their Profit Tax Returns and supplemental forms online through
Hong Kong e-Tax. If the company is a newly registered business, the IRD will issue the profits tax return 18 months after the date of incorporation.

The due dates for companies to file tax returns with a tax representative are as follows:

Accounting year ended

Filing Deadline

Between 1 April to 30 Nov (“N Code”)

30 April of the following year

Between 1 Dec to 31 Dec (“D Code”)

15 August of the following year

Between 1 Jan to 31 Mar (“M Code”)

15 November of the same year

First return of a newly corporated company

3 months from the date of issue of the return (around 18 months after the date of incorporation) 

Companies are liable to file the following documents:

  • The profits tax return form issued by the tax authority
  • A certified copy of the auditor’s report, balance sheet and profit & loss account
  • A tax calculation showing the amounted assessable profits
  • Supplementary form(s) from the tax authority for tax data and financial data

You can also refer to the Corporate Tax Returns Guide to learn more about filing Profit Tax Returns paperwork in Hong Kong.

Provisional Profits Tax

An estimated tax based on the previous year’s figures will be issued along with the tax of the assessment year, this is also known as provisional profits tax paid. The provisional tax can be paid in two installments, the first installment consists of 75% of the liability, and the remaining 25% can be paid in three months.

According to the Inland Revenue Department’s Application for Holdover of Provisional Tax Guide, you can apply for a holdover of provisional profits tax if you qualify for the following conditions:

  • In the year prior to the year of assessment, or of the estimated sum where you are liable to pay provisional profits tax, your assessable profits are less than 90% of the assessable profits.
  • The amount of any loss brought forward for set off to that year of assessment has been omitted or is incorrect.
  • In the year prior to the year of assessment or of the estimated sum in which you are liable to pay provisional profits tax, you have renounced, or will before the end of the year of assessment renounce, your business/trade and that the assessable profits for that year of assessment are, or are likely to be, less than the assessable profits.
  • In the year prior to the year of assessment for which provisional tax was charged, you have objected to your assessment for profits tax.
  • You will be personally assessed for the year of assessment for which provisional tax was charged, and the result will likely reduce your liability to tax.

The application for a holdover of provisional tax should not be submitted later than

  • 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, whichever is later.

Failing to file a tax return by the due date will hold you liable to a fixed penalty based on the tax percentage and/or ground of prosecution.

Tax incentives in Hong Kong

Apart from the well-regulated tax system and low-income tax rates, Hong Kong is recognized for its generous tax incentives, exemptions, and a healthy Double Taxation Agreements (DTA) network of international trade countries.

Double Taxation Relief

Double taxation occurs when a company operates under two or more countries and the regions’ tax jurisdictions overlap. Fortunately, the HKSAR follows a territorial taxation system, where companies are only subject to Hong Kong taxation as long as their income/profit is sourced in Hong Kong. On the other hand, the foreign tax that is accrued in source countries will be credited against the tax levied in Hong Kong.

A Double Taxation Agreement (DTA) enables companies and investors across countries to evaluate taxes with greater ease and clarity. It encourages overseas companies to operate businesses in Hong Kong and vice versa. The HKSARG has established 40 DTAs that minimize the exposure of Hong Kong residents and residents of the DTA partner to double taxation.

Tax Deductions

In Hong Kong, full tax deductions are granted on the following capital expenditures:

  • The renovation of business premises during the 5-year write-off period.
  • Capital expenditure on plant and machinery, especially related to manufacturing and computer hardware and software.
  • Capital expenditure on any environmentally friendly vehicles and machinery.
  • Capital expenditure on the purchase of environmental protection installations within a year of assessment beginning on 1 April 2018 or after.
  • Capital expenditure on the purchase of environmentally friendly vehicles, effective from the assessment year 2010/11.
  • Capital expenditure on intellectual property rights, effective from 1 April 2018.

Allowances on Tax Depreciation (of the fixed asset)

According to section 16 of the Inland Revenue Ordinance, corporate expenditures and costs incurred during the production of chargeable profits are eligible for deductions.

To enjoy the deductions, local branches or subsidiaries in Hong Kong are required to carry out a transfer to head office administrative expenses and claim for the total amount of deductions (incurred during the basis period for the year of assessment) on the tax file return application.

    • Industrial Buildings and Structures

– Initial allowance: 20%
– Annual allowance: 4%
– Balancing allowance or charge is applied upon disposal of the premises

    • Commercial Buildings and Structures

– Annual allowance: 4%
– Balancing allowance or charge is applied upon disposal of the premises

    • Plant and Machinery

– Initial allowance: 60%
– Annual allowance: at rates of 10%, 20% or 30%. Items qualifying for the same rate of annual allowance are grouped under one “pool”.
– A balancing allowance is obtainable when a business ceases, and there is no successor. However, a balancing charge can arise when the disposal continues with one or more assets exceeding the reduced value of the whole “pool” of assets to which the disposed of items belong.

Tax Concessions

In April 2022, the Inland Revenue Department (Amendment) Tax Concessions Bill was passed by Hong Kong’s Legislative Council. It grants a one-time 100% tax reduction for profits tax, salaries tax, and tax under personal assessment for the Year of Assessment 2021/22, in all cases subject to a ceiling of HKD 10,000.

A 50% concessionary tax rate on the standard profits tax rate is applied on the following:

  • Trading profits and interest income derived from short/medium-term debt instruments (QDI) issued before 1 April 2018.
  • Profits derived from professional reinsurance or authorized captive insurance companies for the Year of Assessment 2013/14 onwards.
  • Profits derived from a qualifying corporate treasury center for the Year of Assessment 2016/17 onwards.
  • Profits derived from a qualifying aircraft lessor or a qualifying aircraft leasing manager for the Year of Assessment 2017/18 onwards.

Deductions under Salaries Tax and Personal Assessment

Companies can also claim the following outgoings and expenses that are fully business-exclusive and out-of-necessity incurred in the production of an assessable taxable income:

  • Qualifying Premiums Paid under the Voluntary Health Insurance Scheme (VHIS) Policy
  • Tax Rate Deductions for Qualifying Annuity Premiums and Tax Deductible MPF Voluntary Contributions
  • Tax Deduction for Domestic Rents
  • Approved Charitable Donations
  • Expenses of Self-education
  • Contributions to a Mandatory Provident Fund Scheme or Recognized Occupational Retirement Scheme
  • Depreciation of plant and machinery

Non-deductible Expenses

The following are the often-confused but strictly non-deductible expenses:

  • Domestic private expenses or any expenses not related to profit production
  • Cost incurred when starting a business, such as registration, fees, or any capital investment
  • Cost incurred when improving property or assets
  • Sums that can recovered under insurance or contract of indemnity
  • Any tax payment other than employees’ salaries tax
  • Capital expenses or losses that are considered as “non-deductible” per Section 17 of the Hong Kong Inland Revenue Ordinance (IRO)

Withholding Tax Rules

A non-resident person that trades or has any business relation inside Hong Kong is liable to the Profit Tax regarding qualifying profits acquired in or derived in Hong Kong. If a company or an individual is residing in Hong Kong and they have to pay a non-resident for a service, a part of the payment, also called Withholding Tax (WHT) is levied by the Hong Kong Inland Revenue Department.

To be classified as a non-resident, one has to live and work for no less than 180 days in a tax year in Hong Kong.

Sums received from services in Hong Kong provided by a non-resident or anyone in connection with a commercial occasion or event are chargeable to Hong Kong Profits Tax.

This includes:

  • any appearance of the non-resident in connection with the promotion of any business occasion or event producing profits
  • any participation by the non-resident in or for sound recording, films, videos, radio, television, or other similar events (whether live or recorded)

Learn more about the 3 tax benefits essential for SME owners.

Frequently Asked Questions

Is Hong Kong a tax haven for corporates?

Hong Kong is considered a leading tax haven due to its laws that limit taxation on the island’s wealthy foreign residents and corporations. In 2020, the global accounting firm PwC and the World Bank ranked Hong Kong as the country with the most friendly tax system, second only to Bahrain.

What are the 3 main taxes in Hong Kong?

The Inland Revenue Ordinance levies three direct taxes in Hong Kong, profits tax, salaries tax, and property tax.

What is the VAT rate in Hong Kong?

Hong Kong SAR does not have a VAT (Value-added Tax), sales tax, or goods and services tax.

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