Q and A – Profits Tax In Hong Kong

Business professionals know that Hong Kong is a famous country globally because of its low and simple regime. Moreover, Hong Kong’s profits tax works out very quickly, making Hong Kong the most business-friendly jurisdiction for the people who want to spread their worldwide.

The formation of a new company in Hong Kong is very straightforward. However, when you make a unique and proper set up in Hong Kong, you have to work with taxes because every country receives taxes when you try to incorporate your business into their country.

In hong kong, when you form a new company and start working, the government of hong kong wants you to pay tax incentives once your company starts getting profits. That’s why it is commonly known as profits tax in hong kong.

Hong Kong’s profits tax system works out very smoothly for every business premises, following the easy flat-rate principle and territorial. In addition, the Hong Kong government recently introduced tax incentives to boost the strength of hong kong as the best investment destination.

So before answering the most asked questions about Hong Kong’s profits tax, we will briefly get enough knowledge about what is profits tax and how it works in Hong Kong. Let’s move!

Corporate Tax Rate in Hong Kong:                                           

In Hong Kong, the corporate tax rate refers to the territorial system of taxation, which is only active when your company starts getting profits from the business you are doing. Under the Inland revenue ordinance, profits tax will be levied only on raising profits with a fixed tax rate.

The unincorporated businesses in hong kong are not permissible to pay the profits tax because they are not working legally in hong kong. Therefore, profits arising in your company which is legally registered in Hong Kong will have to pay profit tax to the hong kong company’s registry.

Moreover, the profits tax returns are not payable if your company is working in hong kong, but you are getting profits from anywhere else in the world. The profits tax is expected to reach the capital expenditure managed by the hong kong company.

The corporate tax rate with profits tax is payable whether you are a foreigner working in hong kong or a resident of hong kong. So the only reason to not pay profits tax return is that if your company is working in hong kong but profits arising from somewhere else.

There are many principles made for provisional profits tax, which have two types of methods that you can follow for paying profits tax in Hong Kong:

Options for paying profits tax rate in Hong Kong:

If your company is getting profits by running the business carried in hong kong, then you have to pay hong kong profits tax which can be done in two ways given below:

Two-tiered profits tax rates:

This process of paying profits tax is applied to every business carried out in hong kong, whether it is an incorporated or unincorporated business. In this system, you will get yourself to pay your company’s profits tax with a lower tax rate.

In this method, one has to pay only 2 million of assessable profits for the first time after getting the profits in the company business. The two-tiered profits tax rates aim to lessen the burden of profits tax payment for the small and medium-sized businesses in hong kong.

For unincorporated businesses in Hong Kong, profits tax:

If your company is running an unincorporated business in hong kong, then as a hong kong taxpayer, you have to pay 2 million hong kong dollars you get from the profit. So the first time, you have to pay 75% of the current tax rate.

After that, the profits tax will be payable with a tax rate of 15% during the accounting period. So, you have to keep the audited accounts for profits tax return in hong kong along with withholding taxes.

Corporated business carried out in Hong Kong:

Tax rules should be followed even if you are working in Hong Kong or anywhere else in the world as a Foreign tax paid. For example, incorporated companies working in Hong Kong have to pay the profits tax with a tax rate of 8.25%.

The other remaining profits tax will be payable withholding tax incentives and the tax rate of 16.5% according to the adequately signed draft accounts. Therefore, the tax exemption will help you in lessening the tax burden in the corporate taxation system of Hong Kong.

Tax incentives in Hong Kong:

For offshore business and offshore funds operating in Hong Kong, you can make your company eligible for profits tax exemption. Tax incentives will help you in net profit approximation in your company which comes with the following rules and benefits:

• For capital expenditure incurred, you have to write off the five years on the renovation of business premises.
• Tax concession can be if you want to form a company for funds and trusts helping people in the name of humanity.
• Suppose you want an incentive for investing in a high-payoff business in hong kong. In that case, you can tell the inland revenue department about the expenditures of heavy machinery such as high-paid software and hardware. Professionals operate this type of heavy machinery. In this way, you can lessen your trading profits tax.
• Capital expenditure can be deductible expenses if you tell the inland revenue department about bringing the environment-friendly machinery and tools for your business.

Questions and answers about profits tax:

Q: How can you file your Hong Kong profits tax return?

Usually, the inland revenue department of hong kong issues the profits tax return on the first working of April every year. However, business people can apply for an extension after receiving one month’s profits tax return file.

Steps for filing a profits tax return:

• Once your company is registered for profits tax, you will receive the profits tax return file.
• Within one month of receiving, you can file for the extension of paying profits tax according to the assessable profits tax rate.

Complete set of profits tax return file:

• specific profits tax return form issued by Inland revenue ordinance for a foreign company
• Supplementary form for a financial institution and tax data
• tax computation showing no assessable profits
• other documents if needed (written in instructions)

Q: Who taxpaying entities will qualify for the method of two-tiered profits tax rates?

All the business entities are registered under the Inland revenue ordinance with an assessable profits tax rate. The two-tiered profits tax system is an easy method. The qualifying professional reinsurance business permits you to open annual accounts for your company’s taxable income.

Even if your company has unincorporated businesses, you will also be eligible for qualifying aircraft lessor from the qualifying corporate treasury center. You have to follow Inland revenue rules for sure.

Q: Which business entities cannot qualify their companies for two-tiered profits tax rates?

Profits derived by making your company run a high-paid business have to pay the profits tax. People mostly ask which entities cannot qualify for two-tiered profits tax rates.

This qualification of two-tiered profits tax rates is that the profits chargeable to companies with one or more entities have to nominate which one will qualify for two-tiered profits tax rates.

The two-tiered profits tax rates will be offered to those profits chargeable nominated by the company’s people. Then, the other entity cannot qualify for the two-tiered profits tax rates according to the interest income received.

Section (14J) said that a sole proprietorship business would be able for qualifying aircraft lessors along with provisional tax. The qualifying aircraft leasing manager section enables the corporation not to get the two-tiered profits tax rates.

The sections with qualifying aircraft lessors and qualifying aircraft leasing managers offer the qualifying debt instruments with a capital nature.

Q: What the term “Entity” means in an authorized captive insurance business?

The entity refers to a natural person, legal arrangements, and body of persons. For example, the sole proprietorship business is carried by a natural person, and then a separate entity can be made in the company within every sole proprietorship business.

The legal arrangments done by the entity include:

• A trust
• A corporation
• A partnership

Q: If part of the assessable profits of a taxpaying entity is getting from qualifying debt instruments under the section of qualifying corporate treasury center of IRO for estimated tax and tax reduction, then who will qualify aircraft lessor to have to pay for two-tiered profits tax rates for remaining assessable profits?

The qualifying professional reinsurance business has the taxpaying entity that will qualify for the two-tiered profits tax rates and normal profits tax rate in respect of assessable profits with trading profits receipts.

Q: If running a sole proprietorship business with assessable profits, it is necessary to make an account for profit tax return?

For-profits derived from anyway, you have to make a professional account that can handle all your qualifying profits and tax reserve certificates. However, the country’s law related to profits tax says that for sole proprietorship businesses, there is no need to hire any pro for making accounts.

The authorized captive insurance business with a basis period can work for making accounts on their own if any one of them knows the accounting themselves. The tax liability is always there, but no need to hire a professional.

Q: What will happen to the business people who don’t have a complete business record?

Provisional profits tax paid for provisional tax has to pay. If you don’t have enough business records of provisional tax, then the court will find you. On the other hand, you can be charged up to 100,000 HK dollars for not paying provisional tax, whether it’s two-tiered profits tax rates.

Q: What is the difference between taxable receipts and non-taxable receipts?

Capital assets are termed capital receipts, which are usually non-taxable receipts according to the two-tiered profits tax rates. The daily receipts you get by selling goods in your business are referred to as operating income. However, adjusted assessable profits with personal assessment are typically taxable receipts.

You can consider different things while differentiating between taxable and non-taxable receipts. For example, in your business, the subleasing part of the office, trade deposits, and customer compensation are considered taxable income.

The taxable income comes up when you treat your business as capital expenditure incurred. If your company closes down, then it will become non-taxable. This type of thing can be handled only by professionals who can tackle profits tax situations.

The mandatory provident fund scheme with personal assessment can help you in tax liability on the basis period of your company’s formation according to taxable receipts.

Q: Which type of expenses can behave as deductible expenses from the assessable profits tax exemption?

The provisional profits tax and assessable profits known as operating expenses can be deducted. The example you can take in this question is the rent of paying worker’s house, water, light, and telephone charges.

It also includes the depreciation allowances, wages, and salaries for the employees of business offices. All these things are referred to as mandatory provident fund scheme, which is then deducted from employees’ interest income.

You can add many things to this expense such as repair costs, tools expenses, and appliances in use of the business office because when you form a new company at any place, all such expenses have to pay by the owners of the company as they are the needs of the time.

Q: Which type of expenses business people cannot deduct from their assessable profits?

The expenses that are served on private or domestic purposes cannot be deducted from the assessable profits of your company because they are spending on the basic needs of the people for the basis period.

These types of expenses include birthday celebrations, insurance premiums, utilities such as electricity, water, apartment used for different purposes, traveling costs, overseas traveling for business purposes or not.

All such expenses cannot be deducted because these are simple and basic needs. After all, you cannot work out properly in any country without them, even for business purposes.

Q: How can businesspeople in hong kong prevent double taxation?

People related to the business community working primarily foreign ask how to avoid double taxation. As a new person in another country, you might not understand their system reasonably, which leads to this problem.

If you want to avoid double taxation in HK, then you have to follow the following guidelines given below:

• Keep your profits inside the business rather than dividing them among the company’s shareholders in the form of dividends. It will help you in avoiding double taxation. The reason is that profits tax has to pay on corporate tax, not on the dividends.
• Keep your profits chargeable file in record with the two-tiered profits tax rates system for avoiding double taxation.
• You should pay the salary to the company’s employees rather than giving them dividends. Instead, spend the profits derived from the company’s employees on allowances or bonuses. Then the employees will pay the tax on their own salaries, which will help you.

Q: Is it possible to connect one or two entities for two-tiered profits tax rates?

As we have mentioned, you can use the election system to nominate one entity from others to qualify for two-tiered profits tax rates. However, at the same time or basis period, both entities cannot be eligible for two-tiered profits tax rates according to the sections of IRO of HK country.

You can make out one entity of your company with the help of elections effectively rather than taking suggestions for getting both entities qualifying for two-tiered profits tax rates.

How to cover up the company with the tax treatment of losses?

The assessable profits might have to face losses, but you can do it with some straightforward steps. If you lose hope from one loss, it might lead your company to drown in the sea of mish completely.

Hong kong country has different laws regarding the tax treatment of losses. You cannot transfer the losses among companies of the same corporate groups. It means losses cant to be carried back into the company in the form of assessable profits.

Suppose you are the one who has faced the trading loss in the business, and then your claims for personal assessment. The result of this will be that you will lose the deduction from the total income according to the assessable profits of the company.

Q: What are the rules for withholding tax liability?

Based on assessable profits, the foreign company holders are entertained with withholding tax reductions according to their performance in the HK country. Therefore, you don’t have to pay the withholding taxes on the interest and dividends.

Performances you need for getting withhold tax reduction?

• If your company is connected with any event related to entertainer or sportsman for organizing the events.
• If your company participates in any entertaining sources such as videos, television, sound recording, films, etc.
• Suppose your company is making charitable donations to the people in the name of humanity. It will be considered a sign of good performance, and they will give you a tax reduction facility.

Q: What is provisional profits tax?

At the end of the year, like the assessment year, provisional profits tax has to pay for making a company in HK. You can give the provisional tax in the form of installments—the first installment with a tax rate of 75%.

After three months of paying the first installment, you will pay the remaining profits and a 25% rate. If you have paid the provisional tax in excess amount, the IRO department will add or subtract that amount from the previous installment of the following year.

Conclusion:

According to the law of the HK government, You have to pay the provisional tax, which proves to be a very easy and straightforward process. The HK has made a flexible taxation system for every professional businessman.

So we hope this QnA will help you and calm your insecurities related to the provisional tax system of HK!