Guide to Corporate Tax Rates and Profit Tax in Hong Kong (2022)
Corporate and personal tax rates in Hong Kong are considered the lowest in the world. Hong Kong’s well-regulated tax system and low-income tax rates have led the city to be ranked as one of the top destinations for foreign companies and business owners to set up operations in the region.
In this article, we take a look at the key elements and know-how of the Hong Kong Corporate Tax System.
What is corporate tax planning?
Corporate taxes planning is the process of research and analysis to gain a clear understanding of a company’s financial position and applicable tax laws when preparing financial statements.
A well-researched tax planning will help mitigate potential risks and advance a company through the tax exemptions and deductions established by the regional tax authorities.
The first step in tax planning is learning the types of taxes that companies operating in Hong Kong are liable to pay.
Corporate tax rate and profit tax in Hong Kong
Fundamentally, Hong Kong follows a territorial taxation system with:
- Profits tax is not applicable to profits generated from sources outside of Hong Kong. For example, if a company operates offshore in the US with no operations in Hong Kong but has customers and suppliers in Hong Kong, it is not liable to pay profits tax in Hong Kong.
- If the business operates in Hong Kong, only then is it liable to pay HK tax. The citizenship or country of origin/ headquarters of the company does not affect this regulation, as all businesses operating in Hong Kong fall under the regulations of the regional tax authorities (e.g., Inland Revenue Department, Inland Revenue Ordinance).
Two-Tier Profits Tax Regime
In April 2018, the Hong Kong SAR government implemented the Two-Tier Profits Tax Regime (effective from the Year of Assessment 2018/19), which applies to corporations and unincorporated businesses. The regime was enacted to significantly reduce the tax burden of Small and Medium-sized Enterprises (SMEs) in Hong Kong.
Under the regime, corporations are liable to pay tax at 50% of the original rate (which equates to 8.25%) on their first HKD 2 million of assessable profit. The remaining profits after HKD 2 million are taxed at the original rate of 16.5%.
Unincorporated businesses are also liable to pay tax at 50% of the original rate (which equates to 7.5%) on their first HKD 2 million of assessable profit. The remaining profits after HKD 2 million are taxed at the original rate of 15%.
There are four types of conditions that exclude companies from the two-tiered profits tax regime:
- Companies that have already redeemed a half-tax rate under special tax regimes, which include qualifying corporate treasury centers, insurance businesses, aircraft leasing businesses, and ship leasing businesses.
- The assessable profits for sums received by or accrued to holders of qualifying debt instruments as interest, gains, or profits should already be taxed at half the rate (i.e., 7.5% or 8.25%).
- In the case of a group company, only one “entity” within the “connected entities” can enjoy the two-tier rates. The group needs to select a separate legal entity that will qualify for the two-tier rates.
- Incomes derived from qualifying debt instruments (QDIs) already enjoy tax exemption or a concessionary tax rate (i.e., 50% of the normal profits tax rate, 8.25% or 7.5%). Therefore the two-tiered profits tax regime is not applicable to them.
According to the Inland Revenue Department (IRD), an entity is a “connected entity” of another entity if:
- One of the entities has control over the other,
- Both of the entities are under the control of the same entity or
- In case the first entity is a person operating a sole proprietorship business, while the other entity is the same person operating another sole proprietorship business
An entity is considered to have “control” over another entity if it holds directly or indirectly more than 50% of issued share capital, voting rights, capital or profits in another entity.
Due date for profit tax in Hong Kong
Tax basis period for Hong Kong companies
In Hong Kong, corporate income tax is measured with the assessable profits for a Year of Assessment (YOA), starting from 1 April of the current year to 31 March of the following year. For reference, the Year of Assessment 2021-22 is covered from 1 April 2021 to 31st March 2022.
In each year of assessment, the assessable profits are calculated by adjusting the accounting profit or loss for the financial year ending in that year of assessment
How to calculate your profit tax in Hong Kong?
A company’s net income covers all types of income, whether it is or not derived from the main business, and includes but is not limited to the following:
- Interest income
- Rent income
- Intellectual property rights royalties
- Profits arising from operating a business in Hong Kong
- Grants, subsidies or other financial assistance
- Bills of exchange or certificates of deposit
- Refunds of contributions to retirement schemes
In order to compute a company’s taxable income, the following adjustments should be made to the company’s net income:
Step 1: Deduct non-assessable profits
Profits of non-assessable nature are deducted from the company’s net income.
Step 2: Deduct qualified business expenses
Expenses that are incurred in the production of business income are deducted.
Step 3: Deduct unutilized losses
Losses incurred can either be deducted from the company’s income in the same assessment year or carried forward and deducted from income in subsequent assessment years.
Step 4: Add balancing charges
A balancing charge arises when the sale proceeds of capital assets (i.e., building, structure, plant, or machinery) exceeds its Written Down Value (cost of the asset minus the amount of capital allowances previously claimed).
Step 5: Deduct capital allowances
The depreciation of a fixed capital asset and expenditure incurred on the purchase of fixed assets are not deductible for tax purposes. Instead, tax relief in the form of capital allowances is available for initial capital expenditure and annual depreciation for wear and tear. Capital allowances are available for business premises and for plant and machinery used in the production of profits.
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