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What is profits tax?

Any party, including corporations, partnerships, trustees and organizations involved in any trade, profession or business in Hong Kong, is subject to tax on all profits arising in or derived from Hong Kong (excluding profits arising from the sale of capital assets).     

Profits tax is levied based on assessable profits, which is determined by excluding deductions and tax-exempt incomes. It is further reduced by the tax reduction, subject to a maximum.           

Profits tax rate 

Normal rate 

Generally, profits earned by a corporation are taxed at a standard rate of 16.5 percent, while profits earned by unincorporated businesses are taxed at a standard rate of 15 percent. Starting from the year of assessment 2018/19. the two-tiered profits tax regime has been introduced, which lowers the tax rate for the first HK$2 million of assessable profits.

Two-Tiered Profits Tax Rates in Hong Kong

Assessable profits

Corporations

Unincorporated businesses

First HK$2 million

8.25%

7.5%

Over HK$2 million

16.5%

15%

Under the two-tiered tax regime, the first HK$2 million of profits earned by a corporation will be taxed at 8.25 percent. The remaining profits will continue to be taxed at the existing 16.5 percent tax rate. For unincorporated businesses, the first HK$2 million of profits earned will be taxed at 7.5 percent. The remaining profits thereafter will be taxed at the existing 15 percent tax rate.

However, for two or more connected entities, only one of them may elect the two-tiered profits tax rates. The rest of the entities shall still be taxed at 16.5 percent for corporations and 15 percent for incorporated businesses.

[tips title="Important Tip"]In order to avoid double benefits, enterprises that already benefit from preferential tax regimes, such as the corporate treasury center regime, aircraft leasing regime, etc. shall be excluded from the two-tiered profits tax regime.[/tips]

Additionally, the assessable profits for sums received by or accrued to holders of qualifying debt instruments as interest, gains, or profits shall be excluded, as these should already be taxed at half the rate (8.25 percent or 7.5 percent, as the case may be).

Concessionary rate

A tax rate at 50 percent of the normal profits tax rate will be applied to:

  • trading profits and interest income received or derived from “short / medium term debt
    instruments” (issued before 1 April 2018);
  • qualifying profits of a qualifying corporate treasury centre (for the year of assessment
    2016/17 onwards);
  • qualifying profits of a qualifying aircraft lessor or a qualifying aircraft leasing manager (for
    the year of assessment 2017/18 onwards);
  • qualifying profits of a professional reinsurer or authorized captive insurer (for the year of assessment 2018/19 onwards);
  • qualifying profits of a specified insurer or licensed insurance broker company (for the year of assessment 2020/21 onwards); and
  • qualifying profits of a qualifying ship lessor or a qualifying ship leasing manager (for the year of assessment 2020/21 onwards).

Exemptions

The following sums can be exempted from the assessable profits of a company: 

  • Dividends received from a corporation which is subject to Hong Kong profits tax;
  • Amounts already included in the assessable profits of other persons chargeable to profits tax;
  • Interest on Tax Reserve Certificates;
  • Interest on, and any profit made in respect of, a bond issued under the Loans Ordinance (Cap. 61) or the Loans (Government Bonds) Ordinance (Cap. 64), or in respect of an Exchange Fund debt instrument or in respect of a Hong Kong dollar-denominated multilateral agency debt instrument;
  • Interest income and trading profits derived from long term debt instruments; and
  • Sums received or accrued in respect of a specified investment scheme by or to the person as:
    • A person chargeable to profits tax in respect of a mutual fund, unit trust or similar investment scheme that is authorized as a collective investment scheme under section 104 of the Securities and Futures Ordinance (Cap. 571); or
    • A person chargeable to profits tax in respect of a mutual fund, unit trust or similar investment scheme where the Commissioner is satisfied that the mutual fund, unit trust or investment scheme is a bona fide widely held investment scheme which complies with the requirements of a supervisory authority within an acceptable regulatory regime.

A person is exempt from payment of profits tax in respect of the following sums:

  • Interest (accrued on or after 22 June 1998) that is derived from any deposit placed in Hong Kong with an authorized institution, excluding interest received by or accrued to a financial institution; and
  • Starting from the year of assessment 2009/10, interest on and any profit made in respect of Renminbi sovereign bonds.

Deductions

Deductible expenses

Generally, all outgoings and expenses, to the extent to which they have been incurred by the taxpayer in the production of chargeable profits, are allowed as deductions. A transfer of certain allowable head office administrative expenses by means of a charge to a local branch or subsidiary in Hong Kong would be allowed as a deduction for Hong Kong tax purposes, to the extent to which they were incurred during the basis period for the year of assessment in the production of profits chargeable to tax.

Non-deductible items

  • Domestic or private expenses and any sums not expended for the purpose of producing the profits;
  • Any loss or withdrawal of capital, the cost of improvements, and any expenditure of a capital nature;
  • Any sum recoverable under insurance or contract of indemnity;
  • Rent of or expenses relating to premises not occupied or used for the purpose of producing the profits;
  • Taxes payable under the Inland Revenue Ordinance, except salaries tax paid in respect of employees’ remuneration; and
  • Any remuneration or interest on capital or loans payable to section 16AA; contributions made to a mandatory provident fund scheme in respect of the proprietor or the proprietor’s spouse or, in case of a partnership, to its partners or their spouses.

Expenditure on building refurbishment

  • A person who incurs capital expenditure on the renovation or refurbishment of business premises is allowed to deduct that expenditure over a period of five years in equal installments commencing the year in which the expenditure is made.

Expenditure on plant and machinery specially related to manufacturing, and on computer hardware and software

  • For this kind of expenditure, a full deduction is allowed during the basis period in which the expenditure was incurred.

Expenditure on environmental protection facilities

  • Expenditure on environmental protection machinery – with effect from the year of assessment 2008/09, a full deduction is allowed during the basis period in which the expenditure is incurred.
  • Expenditure on environmental protection installation – with effect from the year of assessment 2008/09, a deduction at 20 percent of the expenditure is allowed during the five consecutive years commencing from the year in which the expenditure is incurred; with effect from the year of assessment 2018/19, a full deduction is allowed during the basis period (instead of over five years) in which the expenditure is incurred for procuring environmental protection installations, including any part of expenditure on environmental protection installation that remains to be deducted (and is to be fully deducted) in the year of assessment 2018/19.
  • Expenditure on environmentally-friendly vehicles – with effect from the year of assessment 2010/11, a full deduction is allowed during the basis period in which the expenditure is incurred.

Depreciation allowances

  • Industrial building allowances on industrial buildings and structures
    • Initial allowance: 20 percent on the cost of construction of the premises
    • Annual allowance: four percent on the cost of construction of the premises
    • Balancing allowance or charge will be due upon disposal of the premises
  • Commercial buildings allowances on commercial buildings and structures
    • Annual allowance: four percent on the cost of construction of the premises
    • Balancing allowance or charge will be due upon disposal of the premises
  • Plant and machinery
    • Initial allowance: 60 percent on the cost
    • Annual allowance: at rates of 10 percent, 20 percent or 30 percent as prescribed by the Board of Inland Revenue in the Inland Revenue Rules, on the reducing value of the asset. Items qualifying for the same rate of annual allowance are grouped under one “pool”.
    • A balancing allowance is available only on cessation of a business to which there is no successor. A balancing charge can, however, arise whenever the disposal proceeds of one or more assets exceed the reducing value of the whole “pool” of assets to which the disposed items belong.

Donations

Charitable donations made to approved charitable institutions or trusts of a public character or to the Government of the Hong Kong SAR, amounting in aggregate not less than HK$100 but not exceeding 35 percent (Year of Assessment 2008/09 onwards) of the adjusted assessable profits before deduction of donations, are allowable for deduction in computing the assessable profits.

Maximum tax reductions

Profits tax for the year of assessment 2021/22* is further reduced by the tax reduction of 100 percent, subject to a ceiling of HK$10,000 per business.

The reduction will be reflected in the final tax payable for the year of assessment 2021/22, but not to the provisional tax of the same year. Therefore, taxpayers are still required to pay their provisional tax on time despite the reduction measure.

Provisional profits tax

Profits tax is chargeable on the assessable profits for each year of assessment. As the assessable profits for any particular year cannot be known until after the end of the year concerned, a provisional tax charge has to be raised. When the assessable profits for the year of assessment are subsequently ascertained, an assessment will be made and the provisional profits tax paid will be utilized to offset the tax liability under the assessment.

The taxpayer can apply in writing for holding over of the whole or part of the provisional tax on the grounds as specified in the Inland Revenue Ordinance.

Grounds for application

An application for holding over of provisional profits tax may be made on one of the following grounds:

  • Your assessable profits for the year of assessment are, or are likely to be, less than 90 percent of the assessable profits for the year preceding the year of assessment or of the estimated sum in respect of which you are liable to pay provisional profits tax. Supporting documents including properly signed draft accounts covering a period of not less than eight months should be submitted together with the application. The amount of any loss brought forward for set off to that year of assessment has been omitted or is incorrect.
  • You have ceased, or will before the end of the year of assessment cease, to carry on your trade, profession or business and that the assessable profits for that year of assessment are, or are likely to be, less than the assessable profits for the year preceding the year of assessment or of the estimated sum in respect of which you are liable to pay provisional profits tax.
  • You have elected to be personally assessed for the year of assessment for which provisional tax was charged, and the election is likely to reduce your liability to tax.
  • You have objected to your assessment for profits tax for the year preceding the year of assessment for which provisional tax was charged.

Time limit for application

Your application for holding over of provisional tax should be lodged not later than:

  • 28 days before the due date for payment of the provisional tax, or
  • 14 days after the date of issue of the notice for payment of the provisional tax, whichever is later.

If the provisional tax is payable by two installments and the first installment has been settled by the due date, an application for holding over of the whole or part of the second installment may be made subject to the prescribed time limit and grounds for application.

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