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Hong Kong Profits Tax Guide 

 

The Scope of Charge


Profits tax is charged on company carrying on a trade, profession or business in Hong Kong in respect of its profits arising in or derived from Hong Kong (excluding profits arising from the sale of capital assets).


There are three conditions under s.14 for profits tax in Inland Revenue Ordinance (IRO), as follows:

 

  

the company must carry on a trade, profession or business in Hong Kong; 

the trade, profession or business derives profits; and 

the profits must be profits arising in or derived from Hong Kong.

  

Territorial Source Principle of Taxation


Hong Kong profit tax is based on a territorial source principle rather than based on residency.  In other word, tax will be levied only on profits arising in or derived from carrying on a trade, business or profession in Hong Kong.  Profits tax is not applicable to profits whose source is outside Hong Kong.


Hence, the location of where a company’s activities take place is the key to whether a company’s profits are taxable in Hong Kong.


If profits are earned from activities that take place entirely outside of Hong Kong, then these profits would not be taxable in Hong Kong even if the company’s transactions are carried out through the company’s Hong Kong bank account. 

 

The question of whether a company has an activity taking place in Hong Kong is a question of fact.  However, some guidance on the principles applied can be found in cases which have been considered by the courts in Hong Kong and in other common law jurisdictions.


As an example, a Hong Kong trading company with a bank account in Hong Kong would not be subject to Hong Kong taxes if:


 

The company has no physical office in Hong Kong.


The company has no staff in Hong Kong.

  

The company has an overseas office in which its central management and controls are located.


    

The company has no customers based in Hong Kong and does not receive payments from customers’ Hong Kong bank accounts. 


     

The company has no suppliers based in Hong Kong and does not make payments to suppliers’ Hong Kong bank accounts.

  

     

The company negotiates and signs contracts with its customers and suppliers outside of Hong Kong.


     

The company’s shipment of goods does not go through Hong Kong and arrangement of shipment is not done in Hong Kong. 


 

For more guiding information on source of profit, please refer to the relevant Advance Ruling Cases published on Inland Revenue Department (IRD)’s web site.


Assessable Profits


A Hong Kong company is taxed on its assessable profits for a year of assessment. The taxable income of a company is arrived at after making certain adjustments to the company’s net profit/loss data such as, deducting business expenses incurred in the production of profits, deducting capital allowances, deducting unutilised losses etc.  


Basis Period


Profits tax in Hong Kong is assessed in relation to a Year of Assessment. The Year of Assessment in Hong Kong is the year ended 31st March (i.e. 1st April – 31st March). For example, the year ended 31st March 2012 is known as Year of Assessment 2011-12.


Generally, the assessable profit for a Year of Assessment is based on the accounting period ending within that Year of Assessment.

  

Profits Tax Rate


The current profits tax rate is 16.5% on assessable profits. All companies are subject to the same profits tax rate irrespective of their residential status. 

  

Tax Filing Requirements and Deadlines


The IRD of Hong Kong generally issues the corporate profits tax returns on the 1st of April every year.


Normally, profits tax return should be filed within 1 month from the date of issue. The compliance date of submission is specified on page 1 of the profits tax return. 

  

In the case of newly registered businesses, the IRD will issue the profits tax return 18 months after the date of incorporation or date of commencement of business.


The company has to file and complete the tax return together with the following supporting documents:


    

A certified copy of the Balance Sheet, Auditor’s Report and Profit & Loss Account pertaining to the basis period.

  

A tax computation with supporting schedules showing how the amount of Assessable Profits (or Adjusted Loss) has been arrived at.


Other documents and information as specified in the Notes and Instructions of the profits tax return.



Books and Records


All companies carrying on business in Hong Kong are required to keep sufficient records, in English or Chinese, of their income and expenditure to enable their assessable profits to be readily ascertained.


There are statutory requirements to record certain specified details of every business transaction.


Business records must be retained for at least 7 years after the date of the transaction to which they relate.

  

Double Taxation Relief


Double taxation occurs when the taxpayer is taxed twice on the same income by two jurisdictions – the jurisdiction where the income arises i.e. the source jurisdiction and the jurisdiction where the income is received i.e. the jurisdiction of residence.


Most jurisdictions make provisions for some form of relief from double taxation by way of entering the double taxation agreements (DTAs) with other jurisdictions. 

  

Hong Kong has established a network of double tax treaties to provide tax reliefs and reduced tax rates. The agreements detail the allocation of the taxing right on income chargeable under the IRO as well as special provisions on the implementation of the agreements.


Please refer to IRD website for a complete list of the various double taxation agreements concluded by Hong Kong with the respective dates of signature and the coming into effect.

 

For further enquiry, please contact us

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