- Accounting profit is not assessable profits. A computation converts one into the other, and the IRD defines assessable profits as net profits for the basis period, excluding profits from the sale of capital assets, arising in or derived from Hong Kong, calculated under Part IV of the Inland Revenue Ordinance.
- Two things sit outside the charge entirely: profits arising abroad and profits from the sale of capital assets. They never enter assessable profits, so they aren’t deductions.
- Depreciation comes out, capital allowances go in. Your accounts’ depreciation is added back and replaced by statutory capital allowances, usually the largest single adjustment.
- 8.25% on the first HK$2,000,000, then 16.5% for corporations, from year of assessment 2018/19. Only one entity among connected entities can elect the two-tiered rates in a year of assessment.
- The enhanced R&D deduction is split. Type B expenditure gets 300% on the first HK$2,000,000 and 200% on the rest. Type A gets 100%. Applying 300% to Type A is a real and costly error.
- What's taxed: assessable profits, not accounting profit, and not turnover.
- What's excluded: profits arising abroad, and profits from the sale of capital assets. Both sit outside the charge.
- The rates: 8.25% on the first HK$2,000,000 of assessable profits, 16.5% above, for corporations from year of assessment 2018/19.
- Where to start: your audited accounts. The computation isn't reliable from management figures.
A profits tax computation is the bridge between the profit in your accounts and the number Hong Kong actually taxes you on. The two are rarely the same. If you’re checking a figure your accountant produced, the gap between them is where the answer lives.
The logic: start from audited net profit, take out what was never in charge, add back what the accounts deducted but the Ordinance disallows, then deduct the statutory reliefs. What’s left is assessable profits, and only then does a rate apply.
In this guide, you’ll learn:
- How the IRD defines assessable profits, and what the basis of charge actually turns on
- What counts as taxable income for a Hong Kong company and what doesn’t, item by item
- The eight adjustments in order, from audited net profit to tax payable
- Two worked examples, one below and one above the HK$2,000,000 threshold
- Where a computation goes wrong, including the R&D and connected-entity traps
What are assessable profits, and why aren’t they your accounting profit?
Assessable profits are the figure Hong Kong taxes, not your accounting profit. You build them from your accounts rather than read them straight off.
The Inland Revenue Department’s profits tax guidance defines them precisely:
“The Assessable Profits (or Adjusted Loss) are the net profits (or loss) [other than profits (or loss) arising from the sale of capital assets] for the basis period, arising in or derived from Hong Kong, calculated in accordance with the provisions of Part IV of the I.R.O.”
Three phrases in that definition do all the work:
- Basis period: fixes which accounting period you’re taxed on.
- Arising in or derived from Hong Kong: limits the charge geographically.
- Calculated in accordance with Part IV: the licence for every adjustment on this page. Your auditor follows accounting standards, and Part IV then overrides them for tax.
So your accounting profit is the starting figure, not the answer. A company can show a healthy accounting profit and modest assessable profits, or the reverse, entirely legitimately.
Which profits is a Hong Kong company actually charged on?
Only profits from a trade, profession or business carried on in Hong Kong, and only those arising in or derived from Hong Kong.
The IRD states the basis of charge as follows:
“Persons, including corporations, partnerships, trustees and bodies of persons carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong from such trade, profession or business.”
Two exclusions are built into that sentence, not bolted on afterwards:
- profits from the sale of capital assets
- profits that don’t arise in or derive from Hong Kong
Neither is a deduction you claim. That’s why both come out early in the computation rather than late.
The depreciation swap can push your tax bill above your accounting profit. Step 2 adds back the whole book depreciation charge, and Step 5 deducts the statutory capital allowances instead. Where the allowances come to less than the depreciation you booked, the net effect is an increase, so assessable profits end up higher than the profit in your accounts. That surprises finance teams who expect every adjustment to reduce the figure.
What counts as taxable income, and what doesn’t?
Trading profits sourced in Hong Kong are in. Offshore profits, capital gains, Hong Kong-taxed dividends and qualifying deposit interest are out.
Each row gives the position and the reason behind it.
| Item | In assessable profits? | Why |
|---|---|---|
| Trading profits arising in or derived from Hong Kong | Yes | The basis of charge |
| Profits arising abroad | No | “No tax is levied on profits arising abroad, even if they are remitted to Hong Kong.” Remittance is irrelevant |
| Profits from the sale of capital assets | No | Excluded at the level of the charge, not deducted from it |
| Dividends from a corporation subject to Hong Kong profits tax | No | Excluded because the profits have already borne Hong Kong profits tax |
| Interest on a deposit placed in Hong Kong with an authorised institution | No, if accrued on or after 22 June 1998 | Exempt, but the exemption does not apply to interest received by or accrued to a financial institution |
| Interest from a qualifying debt instrument issued on or after 1 April 2018 | No | Exempt |
| Depreciation charged in the accounts | Added back | Replaced by statutory capital allowances |
| Non-deductible items (private expenses, fines, non-qualifying donations) | Added back | Not deductible under Part IV |
| Tax losses carried forward | Deducted | Set against assessable profits |
Two cautions before you use that table
Offshore treatment is a claim you make and must evidence, not a default. Having overseas customers doesn’t put profits outside the charge on its own. The mechanics belong with claiming the offshore profits exemption.
Whether a gain is capital or trading is a question of fact, and the IRD contests it regularly. A disposal isn’t capital just because you labelled it that way.
How to calculate profits tax, step by step
You make eight adjustments in order, each one moving a running subtotal, and apply the rate only at the end.
Step 1: Start from audited net profit
Take the net profit per the audited financial statements for the basis period. Not management accounts, not a draft, and not a bank balance. If the audit is still open, any computation you build is provisional, and the requirements for audited financial statements set out what has to be in place first.
Step 2: Add back depreciation
Accounting depreciation isn’t deductible for tax, so add back the whole charge for the period. It’s replaced at Step 5, making this a swap rather than a penalty.
Step 3: Add back other non-deductible items
Private or domestic expenses, fines, capital expenditure charged to profit and loss, and non-qualifying donations all come back. The specifics belong with deductible and non-deductible expenses.
Step 4: Take out profits that were never in charge
Deduct offshore profits and any profits from the sale of capital assets included in the accounts. These are exclusions, not reliefs, so they reduce the figure regardless of how much tax you would otherwise pay.
Step 5: Deduct capital allowances
The statutory replacement for depreciation, covering plant and machinery, industrial and commercial buildings and prescribed fixed assets. Usually the largest adjustment in the computation, and the one most worth checking line by line.
Step 6: Deduct any enhanced deductions
Where they apply, enhanced deductions come off next. The R&D deduction is the common one, and it splits by expenditure type, so read the section below before applying a percentage.
Step 7: Deduct losses carried forward
Trading losses carry forward indefinitely and are set against assessable profits. Track them by basis period, because a change of accounting date stops the periods lining up with years of assessment.
Step 8: Apply the two-tiered rates
What remains is your assessable profits. For corporations, the rate is 8.25% on the first HK$2,000,000 and 16.5% on the balance, from year of assessment 2018/19. For unincorporated businesses it’s 7.5% and 15%.
Outside the two-tiered regime, the flat rates are 16.5% for corporations and 15% for unincorporated businesses, from year of assessment 2008/09.
The lower band is not automatic. You have to elect it. The election is a declaration you make on the profits tax return itself, confirming the entity is chargeable at the two-tiered rates. Skip the declaration and the flat 16.5% applies instead. On HK$2,000,000 of assessable profits that's HK$330,000 of tax rather than HK$165,000, so the declaration is worth HK$165,000.
A worked example: from audited profit to tax payable
Below is a company entirely under the threshold, then one that crosses it. The two-tier mechanic only becomes visible in the second.
Example 1: assessable profits below HK$2,000,000
| Line | Adjustment | Running subtotal |
|---|---|---|
| Audited net profit | HK$1,500,000 | |
| Add back depreciation | +HK$200,000 | HK$1,700,000 |
| Add back non-deductible donation | +HK$25,000 | HK$1,725,000 |
| Deduct offshore profits | −HK$150,000 | HK$1,575,000 |
| Deduct capital allowances | −HK$250,000 | HK$1,325,000 |
| Deduct losses carried forward | −HK$300,000 | HK$1,025,000 |
| Tax at 8.25% | HK$84,562.50 |
The whole HK$1,025,000 sits under the threshold, so one rate applies and nothing splits.
Example 2: assessable profits above HK$2,000,000
| Line | Adjustment | Running subtotal |
|---|---|---|
| Audited net profit | HK$4,000,000 | |
| Add back depreciation | +HK$350,000 | HK$4,350,000 |
| Add back non-deductible items | +HK$50,000 | HK$4,400,000 |
| Deduct offshore profits | −HK$400,000 | HK$4,000,000 |
| Deduct capital allowances | −HK$500,000 | HK$3,500,000 |
| First HK$2,000,000 at 8.25% | HK$165,000 | |
| Remaining HK$1,500,000 at 16.5% | HK$247,500 | |
| Total tax payable | HK$412,500 |
Note what the split does: HK$412,500 on HK$3,500,000 is an effective rate of about 11.8%, not 16.5%. The first HK$2,000,000 keeps the lower rate. Finance teams budgeting at the headline rate over-provide, sometimes materially.
Both examples are illustrative rather than templates. Your own adjustments follow your facts and accounting treatment.
What does the enhanced R&D deduction actually give you?
The answer depends on whether your spending is Type A or Type B, and mixing them up is a real risk rather than a technicality. Both types apply from year of assessment 2018/19.
Type B: 300%, then 200%
Type B expenditure qualifies for 300% on the first HK$2,000,000 of the aggregate amount of payments, and 200% on the remainder. Per the IRD’s FAQ on the enhanced research and development deduction, it covers:
- payments to a designated local research institution for a qualifying R&D activity related to your trade, profession or business
- payments to such an institution whose object is undertaking qualifying R&D for your class of business, where the payment pursues that object
- qualifying expenditure related to your own trade
Type A: 100%
Type A is defined simply as R&D expenditure other than Type B, and it qualifies for 100%. Payments to an overseas university are the IRD’s own example of it.
So the 300% headline attaches to a narrower category than most people assume, with the local-institution requirement doing much of the work. Pay a foreign university for research, claim 300%, and you’ve overstated the deduction.
What goes wrong in a profits tax computation?
Starting from management accounts
A computation built on unaudited figures moves once the audit finalises, and every downstream number moves with it. Wait for the audited position, or mark the computation provisional and expect to redo it.
Confusing an exclusion with a deduction
Offshore profits and capital gains sit outside the charge; disallowed expenses are added back inside it. Mixing them up produces a plausible subtotal that’s wrong by the value of the item.
Claiming 300% R&D on Type A expenditure
Type A is 100%. The 300% and 200% tiers are Type B only. This is the most common technical error on the topic and it overstates the deduction by a multiple.
Assuming offshore treatment rather than claiming it
Having overseas customers doesn’t put profits outside the charge. Offshore treatment is a claim, it must be evidenced, and the IRD tests it. Treat it as work, not an assumption.
Two connected entities both electing the two-tiered rates
An election only works if no other connected entity has elected for the same year of assessment. In a group, that decision has to be made once, centrally, before anyone files.
Carrying losses across a changed year end
Losses track by basis period. Change your accounting date and the basis periods stop mapping cleanly onto years of assessment, which is where carried-forward losses get double-counted or lost.
Where does the computation sit in your tax year?
It’s the second of four stages, and it depends on the one before it. Get the order wrong and you redo work.
- Audited accounts: the computation starts from audited net profit, so audited financial statements come first.
- The computation: turns that figure into assessable profits, and ends at a number.
- The return: submitting that number is a separate exercise, covered by filing your profits tax return.
- Payment: this brings provisional tax into play. If the coming year looks weaker, holding over provisional profits tax is the mechanism to know.
Keeping those four in sequence is most of what a finance function needs here.
How Sleek helps Hong Kong finance teams
Most of the work in a profits tax computation sits in the adjustments, not the rate. That’s also where it stalls, usually because the audit and the computation sit with two different providers.
With Sleek, you can:
- Get the audit and the computation from one team: the computation starts from audited figures, so there’s no handoff to wait on.
- See the adjustments, not just the answer: you get the workings, which is what you need when you’re checking a number rather than accepting one.
- File from the same set of figures: computation and profits tax return handled together, so nothing gets re-keyed between them.
- Reach someone before year end: a named relationship manager on WhatsApp, rather than one conversation each March.
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