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How to Calculate Taxable Income for Hong Kong Companies

Last updated: March 2024

Corporate taxable income, also known as profits tax in Hong Kong, is figured out based on a company’s assessable profits. These profits are determined by adjusting the company’s net profit and loss accounts for the taxable period.

This guide provides an overview of the factors to consider when calculating the taxable income of Hong Kong companies. For more details on corporate taxes in Hong Kong, check out the Corporate Tax Guide for Hong Kong Companies.

What is included in a Hong Kong business net income?

A Hong Kong business’s net income, often called net profit or net earnings, represents the amount of money remaining from its revenues after subtracting all expenses, taxes, and costs. It is a crucial metric that gives insight into the actual profitability of a business over a specific period. For a Hong Kong business, net income includes several components:

All sources of revenue:
- Trading profits (core business activities)
- Investment income (interest, dividends, certain royalty income)
- Rental income
- Capital gains (even if some aren’t subject to tax)
- Income from sources outside of Hong Kong
Deductible expenses: This is a broad category but typically includes:
- Cost of goods sold
- Operational expenses (e.g., rent, salaries, utilities)
- Depreciation of assets
- Interest expenses on business loans
- Bad debts (subject to conditions)
- Tax-deductible charitable donations

How net income is calculated

Net Income = Total Revenues−COGS−Operating Expenses−Depreciation and Amortization−Interest Expenses−Taxes+Other Incomes−Other Expenses

What is the difference between net income and taxable income?

Net income represents the business’s overall profit after subtracting deductible expenses.

Taxable income is a narrower figure calculated after making additional adjustments based on specific Hong Kong tax regulations. Some important things might be non-deductible for tax purposes even though they reduce your net income.

Why is understanding net income important?

Net income gives stakeholders a clear view of a company’s profitability and financial health after all financial obligations have been met, including tax liabilities. It’s a key indicator used in financial analysis, valuation, and assessing the efficiency and profitability of a business’s operations.

Step 1: Determine Assessable Profits

Identify revenue sources and compile all sources of income, including sales of goods and services, rental income, interest received, and any other income generated from business activities in Hong Kong.

Step 2: Subtract Non-taxable Income (ie income that doesn't need to be taxed)

Subtract profits that don’t need to be taxed from the company’s net income. These profits include:

Profits not earned in or from Hong Kong
Money received from selling capital assets
Some dividends or profits that have already been taxed
Interest earned from deposits in Hong Kong, but not interest earned by a bank
Other types of income that are exempt according to the Hong Kong Inland Revenue Ordinance

Step 3: Deduct Allowable Expenses

Deductible expenses in Hong Kong while calculating net income typically include costs directly related to running the business, such as employee salaries, rent for business premises, utilities, office supplies, and marketing expenses.

Non-deductible expenses may include personal expenses, fines or penalties, donations, and expenses incurred for non-business purposes. It’s essential to maintain accurate records and consult with a tax advisor to ensure compliance with Hong Kong tax regulations. Some examples of deductible and non-deductible expenses below:

Examples of Deductible Expenses:

Employee salaries and wages
Rent for business premises
Utilities (electricity, water, etc.) used for business purposes
Office supplies and stationery
Marketing and advertising expenses
Professional fees (accounting, legal, consulting)
Business travel expenses
Insurance premiums for business-related coverage
Depreciation of business assets
Repairs and maintenance of business equipment

Examples of Non-Deductible Expenses:

Personal expenses unrelated to business activities
Fines and penalties imposed by regulatory authorities
Donations to charitable organizations (unless made for business purposes)
Expenses incurred for non-business entertainment or recreation
Expenses related to tax evasion or illegal activities
Gifts or hospitality provided for non-business purposes
Costs associated with personal vehicles used for commuting
Expenses related to personal investments or hobbies
Legal fees incurred for personal matters
Payments made to family members for non-business services

It’s important to note that this list is not exhaustive, and the deductibility of expenses may vary based on individual circumstances and compliance with tax regulations. It’s advisable to seek professional advice from a tax advisor or accountant for specific guidance tailored to your business.

Note: The Inland Revenue Department (IRD) has guidelines on what is deductible.

RELATED GUIDE

Download the list of deductible and non-deductible expenses in Hong Kong

Step 4: Deduct unabsorbed losses

If your business had losses in previous years, you might be able to offset them against current profits. Losses incurred can be deducted from the company’s income in the same assessment year or carried forward to subtract from income in future assessment years. To qualify for deduction, losses must have occurred from conducting business in Hong Kong.

It’s important to note that an adjustment factor is applied when unutilized losses from concessionary trading receipts (those subject to a reduced tax rate) are offset against regular trading receipts (those taxed at a standard rate), and vice versa.

Step 5: Deduct capital allowances

In Hong Kong, businesses can claim capital allowances as deductions when calculating their profits tax. Capital allowances are deductions allowed for the depreciation or amortization of qualifying capital expenditure incurred for the purchase, construction, or renovation of qualifying assets used in the business.

The types of capital allowances available to Hong Kong businesses include:

Initial Allowance: A one-time allowance is granted for the first year of use for qualifying capital expenditure on machinery, plant, or renovations.
Annual Allowance: An allowance for subsequent years following the initial allowance, allowing for the continued depreciation or amortization of qualifying capital expenditure.
Writing Down Allowance: An allowance for capital expenditure not yet fully depreciated or amortized, allowing for further deductions in subsequent years until the expenditure is fully written off.
Balancing Allowance: An allowance granted when a qualifying asset is sold or disposed of, allowing for the balancing out of any remaining unclaimed capital expenditure.
Balancing Charge: An amount added back to assessable profits when a qualifying asset is sold or disposed of at a higher value than its written-down value.

These capital allowances help businesses reduce their taxable profits, thereby lowering their overall profits tax liability. However, the specific rules and rates for capital allowances may vary depending on the nature of the assets and the applicable tax regulations. It’s advisable for businesses to consult with tax professionals or accountants to determine their eligibility for capital allowances and optimize their tax planning strategies.

Have questions about Hong Kong taxes? Contact our experts right away.

Step 6: Consider Tax Incentives

Deduct benefits from specific tax incentives that apply to your business, if any, such as those for research and development (R&D) activities.

Step 7: Calculate Taxable Income

Start with the company’s net profit or loss for the taxable period.
(-) Deduct any non-assessable profits, such as profits not derived from Hong Kong or certain capital receipts.
(-) Deduct any non-deductible expenses, such as personal expenses or capital withdrawals.
(+) Apply any allowable deductions, such as depreciation on assets or charitable donations.
(+) Add any assessable profits brought forward from previous years.
(-) Deduct any unutilized losses brought forward from previous years.
(+) Consider any tax credits or incentives that may apply to reduce the final tax liability.

Step 8: File Tax Return

Complete the relevant tax return forms, attaching necessary documentation and calculations, and submit them to the Hong Kong Inland Revenue Department (IRD) by the specified deadline.

Need help with corporate taxes and filing? Our experts can help. Contact us

FAQs

Frequently asked questions

How is taxable income calculated in Hong Kong?

Taxable income is determined by subtracting allowable deductions from gross income. Deductions include expenses related to business operations, employment, and personal allowances.

What deductions are allowed to reduce taxable income in Hong Kong?

Allowable deductions include expenses incurred in the production of assessable profits, charitable donations, contributions to retirement schemes, and home loan interest payments.

Are capital gains subject to taxation in Hong Kong?

No, capital gains are not subject to taxation in Hong Kong. However, profits derived from trading in stocks or properties may be subject to profits tax if they are considered part of a business operation.

How can I minimize my taxable income legally in Hong Kong?

To minimize taxable income legally, individuals can utilize various deductions, allowances, and exemptions provided by the Hong Kong tax system. It’s advisable to seek advice from tax professionals to ensure compliance with tax regulations while optimizing tax efficiency.

Author

Liam Thomas

Country Head of Hong Kong SAR at Sleek

Liam brings extensive expertise in addressing the challenges encountered by entrepreneurs and small to medium-sized enterprises, particularly in the fintech and payments sectors. With a wealth of experience spanning the UK, Singapore, China, Australia, and Hong Kong SAR, Liam offers global insights and strategic guidance to drive business success.

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