A Guide to Corporate Tax in Hong Kong

Hong Kong is globally recognized for its simple and low-tax environment, making it an attractive destination for businesses of all sizes. The corporate tax system is clear, efficient, and highly competitive—key reasons why so many companies choose to incorporate in this international financial hub.

Whether you're just starting out or already running a business in Hong Kong, it’s essential to understand how corporate tax works to ensure compliance and optimize profitability.

Territorial Tax System

One of the defining features of Hong Kong’s tax regime is its territorial basis of taxation. This means only income that is sourced in Hong Kong is subject to corporate tax.

Foreign-sourced or offshore income is not taxable—even if it's remitted to Hong Kong—provided certain substance requirements and documentation are in place. This rule provides substantial benefits for companies operating internationally.

Corporate Tax Rates

Hong Kong applies a two-tiered profits tax rate system for corporations. The first HK$2 million in assessable profits is taxed at 8.25%, while profits above that threshold are taxed at the standard 16.5% rate.

Unincorporated businesses, such as sole proprietorships or partnerships, are taxed at 7.5% and 15%, respectively.

This two-tier system is designed to support small and medium-sized enterprises by lowering the initial tax burden.

What Income Is Taxable?

Only income arising in or derived from Hong Kong is taxable. This includes:

• Sales made in Hong Kong

• Services performed within Hong Kong

• Rental income from local properties

Non-taxable income typically includes:

• Foreign-sourced revenue

• Dividends from Hong Kong or overseas companies

• Capital gains

• Offshore trading profits (if proven and substantiated)

The Inland Revenue Department (IRD) may require detailed records to validate offshore claims.

Tax Filing Requirements

Every company in Hong Kong is required to file an annual Profits Tax Return (PTR) with the IRD. The first PTR is usually issued 18 months after incorporation, and subsequent returns are issued every April.

Companies must file their returns within one month of the issue date, although extensions are often available, especially for companies with December or March year-ends.

Audited Financial Statements

Hong Kong companies are required to submit audited financial statements along with their tax returns. These must be prepared by a Certified Public Accountant (CPA) in accordance with Hong Kong Financial Reporting Standards (HKFRS).

Audits ensure transparency and accuracy in financial reporting, and are a core part of tax compliance.

Tax Deductions and Allowances

The Hong Kong tax system is generous in allowing deductions for legitimate business expenses. These include:

• Office rent and utilities

• Staff salaries and MPF contributions

• Advertising and marketing costs

• Bad debts and depreciation

• Charitable donations (up to 35% of assessable profits)

Additionally, tax losses can be carried forward indefinitely, though group relief and carrybacks are not permitted.

Double Taxation Treaties

Hong Kong has signed more than 45 Double Taxation Agreements (DTAs). These agreements prevent companies from being taxed twice on the same income when operating across borders.

DTAs also help reduce or eliminate withholding taxes on dividends, interest, and royalties for companies doing business in jurisdictions such as China, Singapore, Australia, the UK, and Germany.

Transfer Pricing and Economic Substance

While Hong Kong has no domestic transfer pricing law, it follows OECD transfer pricing guidelines for international transactions. Businesses must:

• Transact at arm’s length

• Maintain documentation for related-party dealings

• Comply with BEPS (Base Erosion and Profit Shifting) actions

There’s also increased scrutiny on companies claiming offshore tax exemptions, particularly regarding substance and control.

Penalties for Non-Compliance

Failing to comply with tax obligations can lead to serious consequences. These include:

• Fines of up to HK$10,000

• Additional tax assessments

• Prosecution in severe cases

To avoid these risks, it's crucial to maintain good accounting practices and meet all filing deadlines.

Let Woodburn Help You Navigate Corporate Tax in Hong Kong

Woodburn Accountants & Advisors helps entrepreneurs and companies understand and manage their corporate tax obligations in Hong Kong. We provide:

• Strategic tax planning

• Preparation and filing of Profits Tax Returns

• Audit coordination and financial reporting

• Guidance on offshore claims and transfer pricing compliance

Whether you’re a startup claiming your first profits or a multinational managing regional income, we’ll ensure your tax position is fully compliant and optimized.

Get in touch with us today to simplify your Hong Kong corporate tax strategy and maximize your business potential.

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Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.

Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.

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