Taxation in Hong Kong
If you are operating a business in Hong Kong or looking for ways to diversify your business operations, the first thing you should be aware of is the taxation in Hong Kong. While Hong Kong is renowned for its friendly business environment and the low tax structure separate from Mainland China, it does have its rules and regulations to follow on how and when to pay taxes.
If you have a company in Hong Kong, you should know all about the different rules that govern Hong Kong taxes and when you need to pay. If you’d like to know how more, keep reading!
Hong Kong Profits Tax or Corporate Tax
Being an attractive tax regime for corporations and companies, there is low profits tax in Hong Kong. Also these taxes on profits are only on activity conducted within the city, not worldwide. Let’s go through the details of profits tax in Hong Kong.
Low Tax infrastructure
In Hong Kong, businesses and individuals experience one of the most tax-friendly systems in the world. They are liable to pay only three direct taxes, subject to some generous allowances and deductions, which can reduce your taxable amount. Below are the taxes payable in Hong Kong:
- Profits tax – 8.25% for the first HK$2 million of profits earned by a corporation. Above this, the company will be subject to the tax rate of 16.5%. However, for unincorporated businesses such as sole proprietorships and partnerships, the two-tiered tax rates will be set at 7.5% and 15% respectively.
- Property tax – Standard rate of 15%
- Salaries tax – Tiered tax levels starting from 2% to 17%, with a standard rate of 15%
And here are the taxes Hong Kong does not impose:
- No withholding tax
- No estate tax
- No capital gains tax
- No sales tax or VAT
- No tax on dividends
Corporate Tax Rate
Hong Kong charges the corporate tax rate of 8.25% on the assessable profits earned, increasing to 16.5% for profits over HKD 2 million. For businesses all over the world, this tax rate is among the lowest, and is a major reason for Hong Kong being an attractive jurisdiction for incorporating a business. The possible taxation after the chargeable profits may be further reduced by various tax deductions and allowances for the businesses.
Corporate income tax base period
The tax period in Hong Kong runs from April 1st until March 31st. This is the official fiscal year of the city, and determines how both corporate taxes and salary tax is filed. Hence, if you were operating a business in 2019, the year of assessment for 2019/20 would be for the fiscal year ended March 31st, 2020.
However, companies have the right to choose any year’s financial year-end date. Therefore, many companies select the financial year end on December 31st or March 31st, which also enjoys tax filing extensions from the IRD. This is why most organizations choose their financial year-end date on these two dates.
Requirements & Deadlines for corporate tax filing
Generally in April of each year, the Inland Revenue Department (IRD) issues the Profits Tax Return (PTR) for companies. Companies would typically have one month to file the accounts once they receive their financial year-end, subject to extensions.
For new companies, they receive their first PTR 18 months after incorporation. Within the three months from the date of its issuance, the completed PTR should be submitted. For late submissions of the PTR, the IRD may issue a late penalty fee or stricter penalties for non-compliance of PTR filings.
This PTR will establish your company’s first fiscal year end-date. For example, if your first company’s accounts are from December 31st, 2018(date of incorporation) up until March 31st, 2020, then the financial year end for the company will be March 31st for each preceding year. After this all subsequent PTRs must be completed and filed for the company, no later than one month from the issuance date of each year’s PTR.
Territorial Corporate Tax System
Hong Kong works on the principle of a territorial taxation system. In short, only profits which have arisen or derived from carrying on a trade, profession, or business in Hong Kong are taxable. Business owners will not be liable to pay taxes on the profits which are earned outside Hong Kong. Therefore, if you are operating a Hong Kong company, but your source of business is from outside the city, you are not subject to pay profits tax to the IRD. However the IRD has the right to request further information from the company for their offshore profits claim.
It’s important to note that there is no distinguishing between residents and non-residents under this principle. If you earn your profits elsewhere, irrespective of the fact that you are a resident of Hong Kong, you are not liable to pay any tax on those profits. In the same way, when a non-resident gains profits within the boundaries of Hong Kong, they will be liable to pay profits tax in Hong Kong.
Salaries tax in Hong Kong
Now that you have an idea about corporate taxes in Hong Kong, the next important issue to cover is how salaries tax is calculated.
Who all needs to pay personal income tax?
All individuals who earn their income from a place of employment, office, or pension are subject to salaries tax in Hong Kong. However for self-employed individuals carrying on business, they will pay profits tax. The territorial principle of Hong Kong also applies to individuals and salaries tax, so only income will be taxable when it has a primary source in Hong Kong.
Here are some of the categories for income under personal taxation in Hong Kong
- Salary, employment wages and director’s remunerations
- Bonuses, commission income and paid leave from the company
- Company stock awards or stock options from the the company
- Employment termination payments and retirement benefits such as MPF
- Rental compensation from property offered by the employer
Non-resident employees in Hong Kong are often accustomed to numerous benefits from multinational corporations. They should be aware that most employer benefits are also considered taxable income. This includes the benefits paid to you or granted in respect to your employment, as below:
- Education benefits
- Meal allowance
- Share awards and share options
- Accommodation and housing allowance
- Company gifts
The personal income tax rate
For individuals, personal income is used to calculate the net chargeable taxation over the fiscal year.
Assessable income is calculated as:
- Total income – non-assessable income – permitted deductions – personal allowances = net taxable income
For instance, If you are qualified for the basic allowance in the year of 2019/20 (April 1st 2019 to March 31st 2020), then all the income over the basic allowance of HKD 132,000 would be subject to the progressive salary tax rates. Any personal income under this would not be taxed.
Below is a guide for the progressive rate on taxable income for salary tax:
Year of Assessment – 2019/20
0 to 40,000 HKD – 2% tax rate
40,001 to 80,000 HKD – 7% tax rate
80,001 to 120,000 HKD – 12% tax rate
Above 120,001 HKD – 17% tax rate
Once the tax payable for the individual is calculated, this is further reduced by a tax reduction. For the year 2019/20, the tax reduction is 100% of tax payables up to HKD 20,000.
Assessment & Filing
All taxpayers are required to file their annual tax return to the IRD each year. The year of assessment is similar for individual taxpayers, from April 1st to March 31st of the preceding year. By May 1st, the IRD issues the personal tax returns, which needs to be submitted and filed within one month from the date of issuance. Whether you have earned income during the year or not, this still needs to be filled to the IRD.
Once the tax form is submitted, the IRD will review it and determine whether the individual’s income is subject to tax. If taxes are to be paid, the IRD will send a tax demand note to the taxpayer. If the taxpayer disagrees with the calculation of taxes payable, they may send an objection letter within 30 days to the IRD, stating the reasons for the objection.
Auditing in Hong Kong
Auditing in Hong Kong, in short, is an official review of the accounts and books verified by a third party, and is done to get a clear and precise picture of the company’s financial statements. In Hong Kong this is conducted by a Hong Kong CPA, which is an annual requirement for the auditing of the financial statements under the Companies Ordinance.
Every incorporated company should provide the financial statements to the auditor to show the overall business. The financial statements should include an income statement, a balance sheet, and general ledger of the business transactions, if possible. The auditor would then review these statements, and along with the supporting documents, offer their opinion on the accuracy of the financial statements.
Once the audit is finished and the CPA has received all the returned signed audit reports and audit documents, they will send the completed audit report and tax computation to the IRD. As soon as IRD receives these documents, they will review the figures and provide the taxes payable schedule if the company has assessable profits. This could take them a few weeks to even a few months to review, as the IRD may be busy with other tax filings, especially around April, August and November.
Offshore tax exemption in Hong Kong
Now that you have an understanding of the general tax scheme, the next thing you should know is how a company can apply for offshore tax exemption in Hong Kong.
When you carry out your business activities entirely outside of Hong Kong, then your business may qualify for offshore profits tax exemption. The activities include operating business solely outside of Hong Kong, no products or goods sold in the city, and no services with suppliers and customers of HK. If your business includes all of these, then you may be able to apply for profits tax exemption in Hong Kong.
Profit Types Exempted from Hong Kong Taxation
These are the most common types of business income that can be exempt from profits tax in Hong Kong.
- Trading Profits – When a company enters into the terms of the contracts with the suppliers and customers outside of Hong Kong, these companies can claim that the trading profits are non-taxable in Hong Kong.
- Service Income – When a company offers services outside of Hong Kong, the profit earned from these services would be considered for offshore tax exemption.
- Manufacturing Profits – Businesses involved in contract processing or assembly arrangement with an entity which is located elsewhere, similar to an arrangement with the entity itself, it might be possible to claim 50% of the manufacturing profits in Hong Kong.
Requirements to claim for offshore tax exemption
Claims for offshore tax exemption in Hong Kong are lodged together with the submission of the profits tax return, tax computation and the audit report. As the IRD may review the offshore tax claim and the offshore business operations, the company would need to maintain its records to support the claim.
These documents should include:
- Meeting notes with customers and suppliers
- Organization chart showing the location of offshore operations
- Travel expense receipts & passport copies showing locations and dates of visit
- Purchase orders, sales orders and shipping documents
- Telephone bills, emails, and faxes showing to which numbers calls are made to clients/suppliers
If you want more information about the taxation system in Hong Kong, feel free to contact Startupr. We offer consultation and assistance for your company and other information in regards to personal tax returns, company formation, corporate tax returns and offshore profits tax claims. Feel free to get in touch with us today!