Introduction of Hong Kong Tax System : Profit Tax

Hong Kong Tax System

Hong Kong Tax System is simple and tax rate is low compared with most of Asian countries.

There are three direct taxes in Hong Kong. First is profits tax, i.e. corporate income tax. Second is salaries tax to individuals. Third is property tax chargeable on rental income from real estate.

Hong Kong adopts territorial basis of taxation. That means only business profits, employment income and property rental income arising in or derived from Hong Kong is taxable.

Moreover, Hong Kong has no capital gains tax, no VAT and GST.

Currently, Hong Kong has concluded more than 30 bilateral comprehensive tax treaties.

Profit Tax - Tax Rates

The normal tax rate is 16.5% for limited companies and 15% for unincorporated business, such as partnership. From 1^st April 2018, two-tier tax rate regime was introduced. Under this regime, eligible company can reduce half of the tax rate for the first two million Hong Kong dollars assessable profit. That means 8.25% for limited companies and 7.5% for unincorporated business.

Moreover, capital gains, dividend to shareholder and profit sourced outside Hong Kong are tax exempted.

On the other hand, in order to protect tax revenue, provisional tax may be charged based on current year assessable profit.

Profit Tax - Filing

Hong Kong companies can freely choose their accounting year end date.

For companies having year end date between April to November, the tax filing deadline is 2^nd of May of the following year. December year end date companies have tax filing deadline on 15^th August of the following year. Companies having accounting year end date between January and March, the tax filing deadline is 15^th November of the same year.

The first profits tax return is issued around 18 months after the date of incorporation and the filing due date is 3 months from the issue date of the return.

In order to complete the tax filing, the company should submit tax computation report, audited financial statements and profits tax return.

Offshore Income Claim

Unlike most countries, Hong Kong adopts a territorial source principle of taxation. Only business profits, employment income and property rental income arising in or derived from Hong Kong are subject to Hong Kong Profits Tax. It applies to both residents and non-residents of Hong Kong.

Although the concept of locality of the source of income seems simple, in realty its application often can be complex. No universal rule can apply to every scenario.

Whether business is operated in Hong Kong and whether profits are derived from Hong Kong are determined by facts and depend on the nature of profits as well as of the transactions which give rise to such profits.

Not all taxpayer’s operations are relevant to determine the source of profits. The key is focusing on the location of profit generating activities as distinct from incidental activities, such as accounting and auditing.

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