Nil Profits Tax Return in Hong Kong
5 minute read
One of the reasons why Hong Kong is an attractive business destination for a number of foreign investors is the tax system it enforces. Accounting and tax collections are important parts of the law in every country in the world, and Hong Kong is no different.
Every company operating in (or from) Hong Kong has to file the Profit Tax Return (PTR) for each respective year when doing business. The authority that sets the rules for this is the Hong Kong Inland Revenue Department (IRD).
It is up to every responsible company to organize its accounts and prepare them for submission to a Certified Public Accountant. From that point on, the Accountant has to do the auditing and file it further to the government.
But there are so many questions regarding this issue, including the following:
- Are the rules the same for everyone?
- What is a NIL PTR?
- Is a NIL profits tax return filed for companies that have not carried out business activities in Hong Kong?
If you’d like to learn more about this issue and find answers to these questions, keep reading. Below you will find important information regarding NIL profits tax return in Hong Kong.
What is NIL profits tax return?
In order for a tax system to be good and simple for everyone, there has to be a high degree of compliance and understanding both by taxpayers and companies.
In turn, every taxpaying entity has to be aware of their responsibilities. Hong Kong’s tax system is successful precisely because everyone understands their roles.
In Hong Kong, taxpayers (have to) file tax returns timely and accurately to the Hong Kong Inland Revenue Department (IRD).
However, a number of people mistake a NIL PTR return for something it isn’t. The presumption that this tax return is for those businesses that haven’t carried out business activities in Hong Kong is simply not correct. Unfortunately, failing to understand this leads to penalties and legal troubles.
Businesses should file a NIL PTR if they haven’t commenced any business transactions throughout the tax assessment period. The commencement of a company happens when the company starts its activities, that is, doing business with clients.
If your business activities have yet to start, the company director or the secretary has to provide a declaration of a not yet started business. This is done by filing a NIL Profits Tax Return to the IRD by the absence of an audit report.
On the other hand, companies can benefit from the fact that Hong Kong uses a territorial tax system. Tax is levied only on profits that are derived in Hong Kong and zero taxable income for profits made outside of Hong Kong.
However, to take advantage of this, one has to apply for the profits tax exemption and get a grant which states that a company has the offshore status.
How to apply for NIL profit tax return?
If a company has not started with its business activities and has not made any business transactions, a NIL Profits Tax Return can be filed.
On the other hand, when a company starts its business activities, it can no longer file a NIL PTR. (Unless the company is in Dormancy).
It may be difficult to determine the exact day of business commencement. But generally, the day the business starts is usually the day when there are first financial activities or services being provided to clients.
So, if there is no activity at all, it is possible to declare no business activity and file this type of PTR.
Filing the PTR form as NIL in effect states that the company has not conducted business in Hong Kong or anywhere else in the world.
The due date for Profits Tax Return is based on how you set your financial year-end date. For limited companies or unincorporated businesses in Hong Kong, you can practically choose any date as the fiscal year-end date.
The majority of companies in Hong Kong set their financial year-end date on December 31st or March 31st.
If a company wishes to extend the deadline for the submission, a further 2-weeks extension can be granted. However, it is granted to small corporations and small partnership businesses on application if the PTR is filed online.
It is worth underlining that a company that has started business activities outside of the region can apply for the Offshore Profit Tax exemption. However, this should not be mistaken for the NIL PTR.
The difference lies in the fact that the company states it has not done any business with the financial figures filed in the PTR. But it applies to those who want to be exempt from profits tax under Hong Kong regulations.
Logically, the application for the profits tax exemption is made at the same time with the submission of the Audit Report and PTR.
Also, bear in mind that the first financial period of the business normally begins from the date of incorporation until up to 18 months from the incorporation.
The company needs to select financial year-end. For example, should a company pick a year-end on March 31st, every subsequent year after the first day of the new year will be on April 1st and ending on the next March 31st.
All financial statements will have to be prepared during that financial year.
Hopefully, it is clear now what NIL PTR actually is. Again, you should never mistake it for any kind of tax exemption. Especially not offshore, since the legal consequences can be serious and the paperwork that follows is not convenient at all.
If you are not sure that you can handle these processes yourself or if you want to see whether you can apply for tax exemptions, do not hesitate to contact Sleek and inquire about the accounting services we offer.