Corporate tax

The main tax for companies operating in Hong Kong is profits tax.

At the same time, Hong Kong does not levy common foreign taxes such as general sales tax, value-added tax and business tax.

Hong Kong’s tax system

Compared with many regions such as European countries and the United States, Hong Kong's tax system is relatively simple. Its direct taxes are only Profits Tax, Salaries Tax and Property Tax.

Hong Kong adopts a territorial source tax system. Only profits earned in Hong Kong are subject to Hong Kong profits tax. Profits earned outside Hong Kong are not subject to Hong Kong profits tax. The current profits tax rate is 16.5% of net profit (in 2019/20, the first 2 million taxable profits are 8.25%). At the same time, there is no capital gains tax in Hong Kong.

Salaries Tax – Any natural person must report and pay salaries tax on any income arising from or derived from employment in Hong Kong in each year of assessment. Employment income refers to all income earned by the taxpayer from providing employment services in Hong Kong, including pensions, holiday pay, shares, etc. Salaries tax is calculated at progressive tax rates based on an individual's actual taxable income in the tax year, which is approximately 2-17%.

Property Tax – Property tax is a tax levied on property owners (property owners). Property tax for each year of assessment is calculated based on the net assessable value of the property at the standard rate. If the rates paid have been reduced at the time of assessment, then 20% of the balance will be deducted from the standard allowance for repairs and expenses to calculate the net assessable value.

There is no capital gains tax in Hong Kong. Therefore, when conducting import and export business, the Hong Kong Inland Revenue Department will not impose capital gains tax.

However, if the trade involves shipping in and out of Hong Kong ports, the profits earned from the trade will be subject to Hong Kong profits tax.

Under the two-tiered profits tax system, the profits tax rate on the first $2 million of assessable profits of corporate and unincorporated businesses (mainly partnerships and sole proprietorships) will be reduced to 8.25% respectively (the tax rate specified in Schedule 8 of the Inland Revenue Ordinance) half of the standard tax rate) and 7.5% (half of the standard tax rate). Subsequent assessable profits exceeding $2 million from incorporated and unincorporated businesses will continue to be taxed at 16.5% and the standard rate of 15% respectively.

First $2 million of assessable profits

Corporate business (limited company) tax rate 16.5% -> 8.25%

Unincorporated business (sole proprietorship and partnership) tax rate 15% -> 7.5%

Restrictions

All entities with profits chargeable to profits tax in Hong Kong can be taxed according to the two-tiered profits tax rate.

Unless the entity has other related entities that have been nominated for taxation under the two-tiered profits tax rate system.

Related entities

Related entities are defined as

(a) One of the two entities controls the other entity;

(b) Both the former and the latter are controlled by the same entity; or

while the latter is the same person operating another sole proprietorship

If one of the related entities elects a two-tier tax rate for a certain year of assessment, the Commissioner of Inland Revenue may tax it at the two-tier tax rate.

Two-tiered Profits Tax System

The two-tiered profits tax rate system does not apply to other related entities. All assessable profits of the taxable entity will be taxed at 16.5% or 15%, as the case may be. In the same year of assessment, the two-tiered profits tax rate can be elected only if no other related entity elects the two-tiered profits tax rate.

*However, if all relevant conditions are met, different connected entities may elect to be taxed under the two-tiered profits tax rate in different years of assessment. Please contact us for details regarding conditions and restrictions.

Choice of taxation under the two-tiered profits tax rate system

If a taxable entity's election to be taxed at the two-tiered profits rates is invalid or no such election is made, the taxable entity's entire assessable profits will be taxed at a rate of 16.5% or 15%, as the case may be.

Generally speaking, the first company financial statement needs to be completed within 18 months of the company's establishment, and then prepared annually.

Even if the documents have been reviewed and processed by the auditor, the company still needs to keep them for at least 7 years in accordance with the Companies Ordinance.

Every Hong Kong limited company will receive its first profits tax return approximately 18 months after its establishment.

Regardless of whether the company has operated business in Hong Kong or not, the tax return must be submitted together with the audit report within the deadline. (The first tax return usually needs to be submitted within 3 months of the issuance date)

Therefore, we encourage companies to decide on the first year-end date (usually March 31 or December 31) as soon as possible. At the same time, since accounting and auditing work takes time, we recommend preparing accounting and auditing documents in advance, such as invoices, bank statements, contracts, leases, etc. We can also act as a company's tax representative and can help you deal with your tax-related worries.

Our professional accountants help clients review and handle cases. (ie. Tax filing, employer’s salary and pension tax return form BIR56B)

Annual tax return

Handle inquiries and investigations made by the Inland Revenue Department. Every year, the tax bureau conducts random inspections of suspicious companies. Proper and careful handling is very important to avoid and minimize potential losses and fines.

Tax investigation

Tax exemptions

Tax exemptions are a feature of Hong Kong's tax system. Hong Kong adopts the concept of territorial source taxation. Generally speaking, Hong Kong companies are exempt from paying certain income generated outside Hong Kong.