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Navigating Hong Kong's Profits Tax: Guidelines, Rates, and Compliance

In the dynamic business landscape of Hong Kong, understanding the intricacies of profits tax is essential for financial planning and compliance. Let's delve into the essential elements of profits tax, including rates, deductions, and compliance requirements, to ensure smooth sailing in your financial endeavors.

Understanding Profits Tax in Hong Kong

Profits tax is levied on all profits arising in or derived from Hong Kong for entities engaged in trade, profession, or business activities within the region. Assessable profits, the basis for taxation, are computed after excluding deductions and tax-exempt incomes, further subject to reductions.

Two-Tiered Profits Tax Rates

To alleviate the tax burden on smaller businesses, Hong Kong implements a two-tiered profits tax system. This system offers reduced tax rates for assessable profits up to HK$2 million. Here's a breakdown of the rates:

Chart 1: Two-Tiered Profits Tax Rates

Assessable Profits

Corporations

Unincorporated Businesses

Up to HK$2 million

8.25%

7.5%

Over HK$2 million

16.5%

15%

However, certain entities may elect these rates for connected entities, while others remain subject to standard rates.

Concessionary Rate

Special concessions are granted to specific trades, such as qualifying corporate treasury centers or professional reinsurers, with tax rates at 50% of the standard rate.

Exemptions

Various sums, including dividends from taxed corporations and interest income from specified sources, are exempted from assessable profits.

Tax Treatment of Losses

Losses incurred can be carried forward for offsetting against future profits within the same trade, with specific provisions for concessionary tax rates.

Deductible Expenses

Hong Kong allows for a wide range of tax deductions, which can help businesses reduce their overall tax burden. Certain expenses are deductible over time, including building refurbishment and environmental protection facilities.

Chart 2: Deductible Expenses

Expenditure

Details

Building refurbishment

Deductible over a period of five years in equal installments commencing in the year incurred.

Plant and machinery

A full deduction is allowed in the basis period in which the expenditure was incurred.

Environmental protection

A full deduction is allowed during the basis period in which the expenditure is incurred.

Environmental protection installation

A deduction of 20% of the expenditure is allowed in each of the five consecutive years commencing from the year in which the expenditure is incurred.

Environmentally friendly vehicles

A full deduction is allowed during the basis period in which the expenditure is incurred.

Depreciation Allowances

Hong Kong provides depreciation allowances for businesses to reduce their tax burden, including allowances on industrial and commercial buildings, as well as plant and machinery.

Chart 3: Depreciation Allowances

Type

Allowance

Industrial buildings

Initial allowance: 20% Annual allowance: 4%

Commercial buildings

Annual allowance: 4%

Plant and machinery

Initial allowance: 60% Annual allowance: 10%, 20%, or 30%

Filing Profits Tax Returns

Entities must file profits tax returns, supplementary forms, and other required documentation with the Inland Revenue Department (IRD) by the specified deadlines. Electronic submission is mandatory, with extensions available under exceptional circumstances.

Block Extension Scheme

The Block Extension Scheme offers extended deadlines for filing profits tax returns based on accounting periods, aiding in compliance management.

Maximum Tax Reductions

For the assessment year 2022/23, a 100% tax reduction, capped at HK$6,000 per case, is applicable. However, legislative amendments are pending for future implementations.

Provisional Profits Tax

Given the dynamic nature of profits, provisional tax estimates are necessary, with the flexibility to defer payments under certain conditions.

In essence, navigating the realm of profits tax in Hong Kong demands meticulous attention to detail and compliance with evolving regulations. By staying informed and engaging expert guidance when needed, businesses can effectively manage their tax obligations and unlock growth opportunities in this dynamic economic hub.


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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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