Essential Guide on Profit Tax for Businesses in Hong Kong
- Published: 10 April 2025
- 13 min read
- Tax, Bookkeeping
Heather Cameron
Author
Heather is here to inform and inspire our readers. Boasting eight years in the world of digital marketing, working in diverse industries like finance and travel, she has experience writing for various audiences. As Osome’s resident copywriter, Heather crafts compelling content, including expert guides, helpful accounting tips, and insights into the latest fintech trends that will help entrepreneurs, founders and small business owners in Hong Kong take their businesses to the next level.
Sherman Ieong
Reviewer
Sherman Ieong is our Accounting & Tax Manager based in Hong Kong. She is on hand to help our writers level-up our blog posts and guides by making sure the information is accurate, informative and inspiring. Osome’s all-in-one accounting services make managing tax effortless - and that’s exactly what Sherman ensures we do with our Hong Kong-focused blog content, applying her knowledge of day-to-day bookkeeping, monthly financial reporting, Profits Tax Returns and much more.
Curious about profit tax in Hong Kong and how it impacts your business? This guide covers HK profit tax rates, exemptions, and filing requirements. Get the essential details to stay compliant and optimise your tax payments.
Key Takeaways
- Hong Kong’s territorial tax system only levies profits tax on income sourced within the region, making it advantageous for corporate and unincorporated businesses with operations abroad.
- The foreign-sourced income exemption allows qualifying businesses to enjoy a 0% tax rate on profits earned from activities conducted entirely outside Hong Kong, provided they meet specific documentation requirements.
- Charitable donations to approved organisations are tax-deductible up to 35% of assessable profits, and businesses can carry forward losses to offset profits derived in the future.
Overview of the Hong Kong Profit Tax
The Inland Revenue Department only levies profits tax on profits sourced within the region, significantly benefiting businesses with operations inside and outside of the region. There is also no withholding tax on interest income, dividends, or rents.
Capital gains, interest income received from local entities, and dividends from local sources are typically not subject to profits, lowering the tax burden for companies looking to reinvest their earnings. Qualifying profits from selling a company or business are also exempt.
Ensure compliance and maximise tax efficiency with Osome’s hassle-free accounting services. We handle bookkeeping, tax filings, and financial reports, allowing you to focus on growing your business while staying compliant with Hong Kong’s tax regulations.
Profits arising from certain royalties paid to non-residents are also subject to profits tax. This ensures only relevant income streams are taxed, aligning with the Inland Revenue Department's goal of maintaining a competitive and fair tax system.
Tax Exemption for Offshore Profits
Hong Kong’s tax system offers a refined foreign-sourced income exemption (FSIE) regime. This allows specified foreign sourced income to be taxed only if they are received in Hong Kong by multinational enterprises. To qualify, businesses must provide comprehensive evidence, including financial records and contracts, showing their income originates outside Hong Kong.
Companies incorporated in Hong Kong enjoy full profits tax exemption on profits derived from activities conducted entirely outside the region.
However, obtaining this offshore tax exemption requires filing a claim with the Inland Revenue Department and showing that no profit-generating activities occur within Hong Kong. Once granted, this status typically lasts three to five years before it needs to be renewed.
Maintaining offshore tax status requires businesses to avoid generating any profits within the region. Businesses convincingly demonstrating their offshore nature can reap significant financial benefits from this exemption.
Profit Tax Rates
Profits tax rates for incorporated businesses in Hong Kong have been set at 16.5% since the 2008/09 assessment year. However, from the 2018/19 assessment year onwards, a new Inland Revenue Ordinance introduced a two-tiered profits tax system which imposes a lower tax rate of 8.25% on the first HKD 2,000,000 of adjusted assessable profits for incorporated businesses.
Unincorporated businesses, such as sole proprietorships and partnerships, face a tax rate of 15%. Unincorporated businesses also benefit from the two-tiered tax system, with a reduced concessionary profits tax rate of 7.5% on the first HKD 2,000,000 of assessable profits. This structure supports smaller businesses by reducing their initial tax burden, encouraging entrepreneurship and economic growth.
Looking at these tax rates, it is clear that Hong Kong offers a competitive environment for incorporated and unincorporated businesses. For example, the lower concessionary tax rate on the first HKD 2 million of taxable income provides substantial savings for newly registered businesses and small enterprises.
Profits tax also impacts a company's future. Long-term growth planning benefits from understanding the two-tiered system’s effect on tax liabilities. Optimising business structures and operations allows companies to manage tax responsibilities and boost financial health strategically.
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Deductible and Non-deductible Expenses
All costs and expenditures incurred in generating taxable profits are generally eligible for tax deductions. This includes domestic or private expenses directly related to the business operations. For example, if a debt has been confirmed as worthless during the assessment period, it qualifies as a deductible bad debt.
Payments for director remuneration are typically tax-deductible, provided they are not paid to sole proprietors or their spouses. However, interest costs on loans taken for non-earning assets generally do not qualify for deductions under Hong Kong tax rules. According to the Securities and Futures Ordinance, commission income is also not subject to taxation.
When it comes to capital expenditures, such as those related to plant and machinery, businesses can receive an initial allowance of 60% in the year they are incurred. Furthermore, domestic or private expenses on environmental protection installations are eligible for a 20% deduction for five consecutive years.
Qualifying Debt Instruments (QDI)
Qualifying debt instruments are debt instruments specified by the Inland Revenue, such as the exchange fund debt instrument. Qualifying debt instruments enjoy a concessionary tax rate equivalent to 50% of the normal profits tax rate. Interest income and trading profits derived from a QDI are fully exempt, excluding profits arising from a debt issued before April 1st, 2018.
Depreciation Allowances
Depreciation allowances are crucial for reducing overall taxes payable for businesses in Hong Kong. These allowances account for asset wear and tear, providing financial relief over time. For instance, machinery initial allowances may differ significantly from those for plant and machinery.
Claiming depreciation on plant and machinery can lead to substantial tax deferrals and improved cash flow. A detailed depreciation review can identify portions of construction costs related to plant and machinery, thereby enhancing the tax benefits. This practice allows businesses to optimise their tax strategies and better manage their finances.
Understanding the threshold of your annual allowances and claiming accordingly can help businesses plan their investments more effectively. By aligning capital expenditures with the cost annual allowance, companies can maximise their tax savings and reinvest in growth and development.
Charitable Donations and Loss Carry Forward
Charitable contributions to approved charities qualify for tax deductions in Hong Kong, up to 35% of assessable profits if the total exceeds HKD 100. Corporations can claim deductions for monetary donations made to tax-exempt charities or the Government for charitable purposes. This policy supports philanthropy and offers financial incentives for businesses to engage in charitable giving.
The annual allowance for donations must be at least HKD 100 and is capped at 35% of the assessable income after deductions. To substantiate these claims, businesses must retain supporting documents for six years. This documentation is crucial for verifying the legitimacy of the deductions during tax assessments.
Aspect | Details |
|---|---|
| 🎗 Charitable Donations Eligibility | Donations must be made to approved tax-exempt charities or the Government for charitable purposes. |
| 💰Deduction Limits | Donations must exceed HKD 100 to qualify. The maximum deduction allowed is 35% of assessable profits. |
| 📜 Documentation Requirement | Businesses must retain supporting documents for six years to verify deductions during tax assessments. |
| 🔄Loss Carry Forward | Business losses can be carried forward to offset future profits, aiding long-term financial stability. |
| 🚫 No Loss Carry Back | Losses cannot be carried backwards, requiring strategic financial planning for tax optimisation. |
In addition to charitable donations, businesses can carry forward losses to offset profits in the future. This provision helps companies manage their financial health by smoothing out profitability fluctuations over different tax years. Losses cannot be carried backwards, highlighting the need for strategic financial planning.
Filing Profit Tax Returns
Filing profits tax returns is a crucial responsibility for businesses in Hong Kong. The tax authorities issue three series of profits tax return forms tailored to different types of entities. Corporations and partnership businesses must complete the appropriate profit tax return and any required supplementary forms, such as IR1478 and IR1479. Sole proprietorship businesses report their profits in the individual’s tax return - BIR60.
The filing process can be completed electronically through the eTAX system, which streamlines the submission and documentation process. It lets incorporated and unincorporated businesses view, save, and print submitted profit tax returns. If a corporation’s return is submitted via a service provider, a signed confirmation document must be included to validate the submission.
For those opting to submit their tax returns in paper form, downloading and electronically filling out the necessary forms is required. Additionally, businesses must provide signed draft accounts for at least eight months to support their application for holding over provisional profits.
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Supplementary Forms and Electronic Submission
Supplementary forms like IR1478 and IR1479 are essential in the tax filing process. These forms are designed to report various aspects like tax incentives and foreign-sourced income. Whether the primary submission is electronic or paper-based, these supplementary forms must be submitted electronically with a signed Control List for paper submissions.
To file tax returns online, you should use secure Internet filing services to ensure a secure and efficient filing process, reducing errors and delays.
Businesses Exempt from Annual Returns
Certain businesses in Hong Kong are exempt from submitting annual profits tax returns under specific conditions. For instance, businesses that do not generate assessable profits are not required to file these returns. Similarly, companies with no assessable profits for a given year are exempt from filing annual returns.
Entities that have ceased or not yet started operations are also exempt. The exemption reduces the administrative burden on businesses not generating income, allowing them to focus on establishing or winding down operations without added tax filing pressure.
Tax Filing Deadlines and Extensions
The general deadline for filing profits tax returns in Hong Kong is one month from the issue date. However, businesses can apply for an extension if they provide a written request with an explanation and supporting evidence. The Block Extension Scheme allows tax representatives to file returns later than the standard deadline, facilitating more flexible compliance.
Tax representatives can electronically apply for block extensions through the GovHK website, making the process more convenient. Extensions beyond the Block Extension Scheme are typically only approved under exceptional circumstances. Once submitted, the business will receive a profits tax file number for future reference.
Aspect | Details |
|---|---|
| 📅 General Filing Deadline | Businesses must file profits tax returns within one month from the issue date. |
| 🕒Extension Options | Companies can request an extension with a written explanation and supporting evidence. The Block Extension Scheme allows tax representatives to file returns later than the standard deadline. |
| 🌐 Electronic Application | Tax representatives can apply for block extensions online via the GovHK website for convenience. |
| ⚠️Further Extensions | Additional extensions beyond the Block Extension Scheme are only granted under exceptional circumstances. |
| 💰 Provisional Tax Deferral | Businesses can apply to defer provisional profits tax if their expected profits are lower than in previous assessments. |
| 🚨 Penalties for Late Filing | Fines up to HKD 50,000 and possible prison sentences of up to three years for non-compliance.💸 |
Failing to file a tax return in Hong Kong can result in severe penalties, including fines of up to HKD 50,000 and potential prison sentences of up to three years. Therefore, timely compliance with filing deadlines is crucial to avoid these significant consequences.
Consequences of Non-Compliance
Non-compliance with profits tax filing requirements in Hong Kong can lead to progressive penalties from the Inland Revenue Department (IRD). Late submission of a tax return may incur a fine of up to HKD 10,000, with additional penalties possible for repeated offences.
Incorrect tax returns can result in fines of up to HKD 50,000 and the possibility of a three-year prison term. The IRD can also impose additional tax assessments as penalties for tax offences, which may be three times the amount of tax underreported.
Prosecution for failing to keep proper business records can result in fines of up to HKD 100,000.
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Provisional Profits Tax
Provisional profits tax in Hong Kong is based on assessable profits for each assessment year. Provisional tax paid will be deducted from the final liability, ensuring that businesses only pay tax on their actual earnings.
If a business incurs losses during the accounting year, the final tax amount creates an offset against qualifying profits in the future within the same trade. This flexibility allows businesses to manage their tax duties more effectively.
Taxpayers have the option to defer some or all of their provisional tax. This is possible if they can provide valid reasons under the Inland Revenue Ordinance. Companies may also purchase tax reserve certificates, which are designed to help individuals and businesses build up funds that can be used towards paying taxes.
Special Tax Incentives
Hong Kong offers a range of special tax incentives designed to attract specific industries and enhance the region’s economic competitiveness. Qualifying corporate treasury centres, for instance, can allow for reduced profit tax rates under certain conditions, making Hong Kong a prime location for financial activities. This encourages multinational corporations to establish their treasury operations in Hong Kong.
The following entities can qualify for special tax incentives in Hong Kong:
- Qualifying aircraft leasing managers benefit from preferential tax treatment on qualifying aircraft leasing activities, which enhances Hong Kong’s status as a global aviation hub. The same goes for qualifying ship leasing managers.
- Qualifying transactions from fund management and certain financial service activities may also enjoy a lower tax rate or full deduction, thanks to specified investment schemes targeting the financial industry.
- Taxable income from licensed insurance broker companies benefits from tax deductions
These incentives reduce the tax burden for eligible businesses and promote the growth of key sectors in Hong Kong’s economy. By leveraging these benefits, businesses can optimise their tax strategies and contribute to the region’s economic development.
Optimise your tax strategy with Osome’s expert accounting services—we help businesses in Hong Kong navigate special tax incentives, ensuring compliance while maximising savings. Contact us to make the most of Hong Kong’s tax benefits.
Summary
Understanding Hong Kong’s profits tax system is crucial for businesses aiming to maximise their financial efficiency and compliance. From the lack of withholding taxes, the territorial tax system, the various exemptions for capital expenditures, business carried overseas, and certain types of business income to the detailed processes of filing returns and claiming deductions, each aspect offers opportunities for optimisation. By staying informed and leveraging the available tax incentives, businesses can navigate the complexities of Hong Kong’s tax landscape and achieve significant financial benefits. Remember, compliance is not just about avoiding penalties—it’s about making the most of the tax regime to support business growth and sustainability.
Heather is here to inform and inspire our readers. Boasting eight years in the world of digital marketing, working in diverse industries like finance and travel, she has experience writing for various audiences. As Osome’s resident copywriter, Heather crafts compelling content, including expert guides, helpful accounting tips, and insights into the latest fintech trends that will help entrepreneurs, founders and small business owners in Hong Kong take their businesses to the next level.
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FAQ
What is the standard deadline for filing profits tax returns in Hong Kong?
The standard deadline for filing profits tax returns depends on the financial year-end of the company. Generally, for companies with a financial year ending on December 31, the basis period begins on April 30 of the following year, while those with a year ending on March 31 must file by November 15.
Do businesses need to pay profits tax if they have no operations in Hong Kong?
Businesses without operations in Hong Kong have no taxes payable there, irrespective of their assessable profits. This ensures that companies not conducting business activities in Hong Kong remain exempt from this tax obligation.
How much is the tax rate for profits tax in Hong Kong?
Hong Kong has a two-tiered tax rate. The first HKD 2 million of assessable profits is taxed at 8.25%, and the remaining balance is taxed at 16.5%. Certain incomes, however, may enjoy a lower commissary tax rate due to acceptable regulatory regimes. Companies also receive an annual allowance for depreciation, which can be used to offset taxable amounts for the year.
Are capital gains taxed in Hong Kong?
According to the collective investment scheme, capital gains are not taxed in Hong Kong, even upon selling a company or business. The region also provides various preferred treatments for qualifying capital expenditures. This makes Hong Kong an attractive location for investment and entrepreneurial activities, such as corporate treasury centres.
Can losses from previous years be carried forward?
Yes, losses from previous years can be carried forward to offset future profits, counting towards your annual depreciation allowance for the next year. However, they cannot be carried backward. When filing for depreciation and losses, stay aware of your initial allowance at the beginning of the fiscal year.
What happens if a company does not file its profits tax return on time?
If a company does not file its profits tax return on time, it may incur escalating penalties and the tax authority may estimate profits, which could result in a higher tax liability.
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