A Business Owner Guide: How to File Your Profit Tax Returns (BIR51)
8 minute read
Filing your Profit Tax Return has two main purposes. It doesn’t only allow you as a business owner to declare your earnings to the IRD and pay any taxes owed, but also enables you to take advantage of various perks that will benefit you in the short and long term.
Aside from these key reasons, you need to file your Profit Tax Returns on time in order to avoid added interest and penalties, avoid losing future refunds, and safeguard your credit. If the IRD files a tax lien against you, your credit scores could be affected too.
This article will guide you on how to file your Profit Tax Returns in Hong Kong.
What is a Profit Tax Return?
The term Profits Tax Return refers to the income tax that is levied on any profits made by a business in Hong Kong. It applies to all Hong Kong residents, professions, and businesses, with the exception of income from the sale of capital assets.
For instance, when a business purchases a wall projector for use in its workplace, the device is considered a capital asset. This doesn’t require a profit tax return.
Self-employed individuals are subject to profits tax:
- If somebody opens a new store in Hong Kong, this income is considered Hong Kong-based since the money is received from transactions conducted by Hong Kong citizens. Therefore, the earnings will be taxable.
- Or if the majority of your clients are from Hong Kong where you work as a freelancer, your earnings will be taxed despite the fact that you’re not a company owner.
The Inland Revenue Department (IRD) will send Profit Tax Return forms to companies operating in Hong Kong, every April.
Types of Profit Tax Returns
There are three types of Profit Tax Returns form for corporations, small businesses, and partnership businesses.
The Inland Revenue Department issues these forms.
Profits Tax Return – Corporations (BIR51)
Companies that operate or have a presence in Hong Kong are subject to this regulation.
When filing a Profits Tax Return, small corporations and dormant businesses are not required to provide supporting papers.
Before completing and submitting BIR51, small corporations and dormant entities have to complete their audited financial statements and tax computations.
Profits Tax Return – Persons other than Corporations (BIR52)
This form is applicable to businesses that operate as a partnership with a Hong Kong presence.
Businesses that switched from a partnership to a sole proprietorship or vice versa throughout the year should record their earnings or losses in BIR52 (not BIR60) for the full basis period of the year of transition. This is applicable to individual taxpayers.
When generating foreign currency financial statements, companies should utilize the yearly average rate as of the account closing date.
Profits Tax Return – In Respect of Non-Resident Persons (BIR54)
Non-residents with taxable income coming from, or derived from a trade, profession, or work carried out in Hong Kong are subject to this tax.
The phrase ‘non-resident person’ has long been used by the IRD to describe someone who doesn’t have a permanent commercial presence in Hong Kong.
A BVI incorporated firm, for example, should not be considered a non-resident if its directors are Hong Kong residents and its core management and control is in Hong Kong.
What do I need to do to file my Profit Tax Returns?
Let’s walk you through the requirements so you can figure out if and how your business needs to pay profits tax:
- Newly registered businesses must file Profit Tax Returns 18 months following their start date or incorporation date. Corporations must file a profit tax return form (BIR51) as well as audited financial statements.
- Form BIR51 and other required supplementary forms are all that is required of small corporations and dormant businesses. Financial statements that have been audited are not required. For small businesses, the information on Form BIR51 must be based on audited financial accounts, which you should keep in case the authorities ask for them.
- If your business changes from a partnership to a sole proprietorship within a year, you should record your profit and loss on Form BIR52 for the entire year.
In general, a freshly-registered business will get its first profits tax return around 18 months after the date of commencement of business or the date of incorporation.
Every year on the first working day of April, the yearly activity of issuing Profits Tax reports in bulk takes place.
In cases where the trade, profession, or business carried on doesn’t generate assessable profits or where the trade, profession, or business has not begun, IRD doesn’t require the annual filing of Profits Tax reports.
The duty to lodge the return form must still be met if you get a Profits Tax return, which may be provided from time to time in the course of examining your future tax potential.
How do I start filing my Profit Tax Returns?
When filing a Profits Tax Return, the IRD should receive the form, additional paperwork, and any applicable supplemental forms within one month of the date stated on the Profits Tax Return.
The exact date of submission is found on the first page of the form. You can use Hong Kong e-Tax to file your Profit Tax Returns and supplemental forms. A request for an extension may be granted if a business’s earnings tax return cannot be submitted in one month.
At the start of each year, the IRD sends out a circular letter to tax representatives describing the details of the block extension scheme and how tax representatives can help their clients apply.
To encourage electronic filing, the Department will offer a 2-week extension on a case-by-case basis after the customary due date, provided that small companies and small partnership businesses file their profits tax filings online.
The prerequisites that a corporation or a partnership must meet in order to use the Internet filing service can be found on the Completion of Profits Tax Return page.
There are ten supplementary forms that you may need to fill out. Supplementary forms are used to denote details about tax incentives and preferred regimes.
These supplemental forms must be submitted along with your Profit Tax Return forms. Even though it’s not required to submit supplemental forms, you should nonetheless prepare them in case the authorities request them.
Since the additional forms are part of the return, they need to be filed with it. Where applicable, you should download the supplemental forms and fill out the form electronically.
You may use these forms as a source of information. Our accountants are also able to guide you on the forms you’ll need to fill out, as the paperwork you’ll need to submit will vary depending on your industry.
What are NIL Profit Tax Returns?
Every taxpaying entity must be informed of its obligations. The success of Hong Kong’s tax system is due to everyone’s understanding of their specific roles. Therefore, a large majority of taxpayers in Hong Kong submit timely and correct tax returns to the Hong Kong Inland Revenue Department (IRD).
Many individuals, however, misinterpret a NIL PTR return for something it isn’t. The assumption that this tax return is for enterprises that have not conducted business in Hong Kong is just incorrect. Failure to comprehend this, unfortunately, results in sanctions and legal issues.
If a business hasn’t started any business transactions during the tax assessment period, it should file a NIL PTR.
What if I missed the Profit Tax Returns submission date?
For some, the one-month deadline is insufficient to finish their profit tax return form. But luckily, a company can request an extension. The IRD will send out a Circular Letter at the start of the year to inform representatives about the Block Extension Scheme.
It includes programs for block extension and notifications of detailed updates.
A further extension of time beyond the Block Extension Scheme extended due dates will be given only in the most extraordinary situations.
Any such request should be given in writing, together with an explanation of why the procedure cannot be completed in a timely manner and supporting documentation.
Is there any consequences if I fail to comply?
A fine may be imposed if a legal entity fails to comply with its tax duties. For instance, this could be failing to keep adequate records of income and spending, filing an erroneous return without fair cause, or failing to comply with the requirements of the notice.
The penalties and fines vary. The highest penalty is HK$50,000 plus a fine of three times the undercharged sum plus three years in prison.
For both businesses and individual taxpayers, filing tax returns may be a daunting task. We are here to assist you in filing an error-free profit tax return, as our expert team have proven records of success with the laws and regulations of the Inland Revenue Department Hong Kong.
Don’t hesitate to reach out to Sleek if you need assistance in your business’ growing needs, we help businesses in accounting, tax and audits and more.