Hong Kong’s reputation as a global business hub can be attributed to its business-friendly and competitive corporate tax system. Thanks in no small part to the wealth of preferential tax policies, the international metropolis has attracted legions of start-ups and multinational corporations alike to set up shop. More than 9,000 overseas and mainland businesses now proudly call Hong Kong home.
To enhance Hong Kong’s competitiveness, the Hong Kong SAR Government introduced a host of tax incentives in the 2023-24 Budget. Most notably, profits tax, salaries tax, and tax under personal assessment were reduced for the 2022/23 year of assessment. Other measures include refining the aircraft leasing preferential tax regime and offering tax concessions to family-owned investment holding vehicles.
Hong Kong boasts a simple and straightforward corporate tax system compared to other jurisdictions. This notwithstanding, you should have a sound knowledge of its operation to fully leverage the benefits of favourable tax policies. In addition, it is important to observe your tax filing obligations to keep fines and penalties at bay.
This guide will help you navigate the workings of corporate income tax or profits tax in Hong Kong.
For a concise summary of Hong Kong taxes 2023-24, click here.
For a comprehensive review of the different types of taxes applicable in Hong Kong, read our Complete Guide to Hong Kong Tax.
Table of Contents
To whom does Hong Kong corporate income tax apply?
Corporate income tax or profits tax applies if you engage in a trade, profession, or business in Hong Kong and derive profits from it. Profits arising from the sale of capital assets is generally not chargeable to profits tax.
To establish whether you are liable to profits tax, Hong Kong’s tax authority, the Inland Revenue Department (“IRD”), will consider:
- Whether you engage in a trade, profession, or business in Hong Kong;
- Whether the trade, profession, or business generates profits; and
- Whether the profits are sourced from Hong Kong.
The tax is levied on every person who meets the above criteria. The definition of “persons” includes corporations, partnerships, trustees, bodies of persons, and sole proprietorships.
The IRD treats domestic and foreign entities on equal footing for tax purposes. The crucial criterion for establishing whether profits tax applies is one of locality – namely, whether the profits in question originate in business activities carried out in Hong Kong. This means that any foreign enterprise, including its branches, is subject to profits tax as long as it derives income from conducting business activities in Hong Kong. On the other hand, income sourced from abroad by a domestic enterprise does not generally attract profits tax.
What is the basis of Hong Kong corporate income tax?
Territorial-based system
Hong Kong operates a territorial basis of taxation. In other words, income generated within Hong Kong is taxable, while income sourced from outside Hong Kong is not. An exception to the rule applies to certain types of offshore income received by an entity of a multinational enterprise group, which will be discussed further below.
Although the territorial-based system appears to be straightforward in theory, its operation in practice may sometimes give rise to ambiguity. Therefore, the IRD takes the following principles into account when assessing the origin of profits.
- Question of fact: The source of profits is a matter-of-fact question that can be objectively determined. While there is no one-size-fits-all rule, the determination of whether profits originate in Hong Kong depends on the nature of profits and the transactions which generate them.
- Operations test: The two-part test involves identifying the activities from which profits arise and the location where such activities take place.
- Preceding or accompanying activities: The location of operations is examined in the broader context of other activities that precede or accompany these operations.
- Where decisions are made: The location where day-to-day investment and business decisions are made is a relevant but not a determining factor.
- Gross profits: To determine which profits are Hong Kong-sourced and which are offshore-sourced, the IRD will examine the breakdown of gross profits by referring to individual transactions.
- Principal place of business: Where a company’s primary business operations are in Hong Kong, and it does not have a presence in another jurisdiction, its profits are usually subject to tax in Hong Kong. This does not mean, however, that profits accrued to a domestic enterprise without an overseas presence are automatically deemed to be Hong Kong-sourced.
Determining the source of profits for trading businesses
The origin of profits for trading businesses is usually the place where purchase and sales contracts are effected. “Effected” not only covers the execution, but also the negotiation and finalisation of the contract as well as the fulfilment of contractual obligations.
According to the IRD, the correct approach is to consider all the relevant activities undertaken to generate profits, rather than solely focusing on the sale and purchase of goods. Relevant activities include the procurement and storage of goods, order processing, financing arrangements, etc.
Determining the source of profits for manufacturing businesses
The origin of profits for manufacturing businesses is usually the place of production. Profits arising from the sale of goods manufactured in Hong Kong are chargeable to tax.
However, if the goods are partly produced in Hong Kong, only the portion of profits attributable to the manufacturing process outside Hong Kong will not be deemed Hong Kong-sourced. The location where the manufactured goods are sold plays no role in the assessment.
- Import-processing arrangement with a foreign-invested enterprise (“FIE”) in mainland China
It is common for Hong Kong-based entities to enter into an import-processing agreement with an affiliated FIE on the mainland. The usual mode of operation involves the Hong Kong entity selling raw materials to the FIE. The FIE then utilises these raw materials to manufacture the final products, which are subsequently sold back to the Hong Kong entity. It follows, then, that the Hong Kong entity acts as a trader of raw materials and final products, while the FIE takes charge of the manufacturing process.
According to the IRD, the profits earned by the Hong Kong entity through trading activities cannot be considered as arising from the FIE’s manufacturing activities. The liability for profits tax in respect of the trading activities remains squarely with the Hong Kong entity. Sharing the tax liability between the Hong Kong entity and FIE is not allowed.
Offshore income of multinational enterprise entities
On 1 January 2023, changes to Hong Kong’s foreign-sourced income exemption regime came into force. Under the reformed regime, four types of income originating outside Hong Kong – interest, dividends, disposal gains from the sale of equity interests, and intellectual property-related income – are deemed to be sourced from Hong Kong and, thus, subject to profits tax if they are received by a multinational enterprise entity.
Click here for a detailed analysis of the amendments to Hong Kong’s offshore-sourced income exemption regime.
What is the Hong Kong corporate income tax rate?
Hong Kong operates a competitive and advantageous two-tiered profits tax system.
For corporations |
Tax Rate |
|---|---|
|
First HKD 2 million |
8.25% |
|
Remainder |
16.5% |
For unincorporated businesses |
Tax Rate |
|---|---|
|
First HKD 2 million |
7.5% |
|
Remainder |
15% |
To prevent tax avoidance, only one entity within a group of related entities can benefit from the preferential two-tiered tax rates in a given year of assessment.
Anti-avoidance measures also apply to enterprises that are already taking advantage of other concessionary tax regimes, such as those for aircraft leasing companies, corporate treasury centres, captive insurance companies, and professional reinsurance companies.
What tax incentives can you take advantage of?
You can enjoy a concessionary tax rate of 8.25% on assessable profits if you are a/an:
- Professional reinsurer engaged in the reinsurance of onshore and offshore risks;
- Authorised captive insurer engaged in the insurance of onshore and offshore risks;
- Direct insurer engaged in qualifying general insurance business;
- Licensed insurance broker company engaged in qualifying insurance brokerage business;
- Corporate treasury centre engaged in qualifying lending transactions, or corporate treasury services or transactions;
- Aircraft lessor engaged in qualifying aircraft leasing activities;
- Aircraft leasing manager engaged in qualifying aircraft leasing management activities.
You can enjoy tax exemption on assessable profits if you are a:
- Ship lessor engaged in qualifying ship leasing activities;
- Ship leasing manager engaged in ship leasing management activities (a concessionary tax rate of 8.25% applies to activities undertaken for non-affiliated entities);
- Family-owned investment holding vehicle or family-owned special purpose entity in respect of qualifying transactions and incidental transactions.
In addition, the following items are eligible for tax exemption:
- Interest on any deposit placed with an authorised institution in Hong Kong (except interest received by a financial institution)
- Net carried interest derived by eligible entities engaged in the provision of investment management services for qualifying investment funds
- Gains derived from eligible debt instruments
- All kinds of funds, including offshore funds relating to profits from transactions in securities, futures contracts, foreign exchange contracts, etc. as well as private equity funds.
What deductions are allowed?
Deductible items
In general, any expenses that you have incurred in the generation of assessable profits qualify for deduction, including the following:
- Registration fees in respect of trademarks, designs, patents, or plant variety rights used in the generation of assessable profits
- Qualifying donations to charities that amount to at least HKD 100 in total but must not exceed 35% of assessable profits
- Bad and doubtful debts
- Interest on funds used for generating profits
- Rental expenses for buildings or land used for generating profits
- Repair works on premises, machinery, plant, and other items used for generating profits
- Contributions to an employee’s mandatory provident scheme, subject to an upper ceiling of 15% of the employee’s annual income
- 20% deduction for expenditure on copyrights, performer’s economic rights, topography rights, protected plant variety rights, and registered designs or trademarks for five consecutive years of assessment
Expenditure on the following items can also qualify for a deduction of 100%.
- Certain manufacturing machinery or plant
- Computer hardware and software
- Environmentally friendly vehicles
- Environmental protection-related plant and machinery
- Environmental protection-related installations
- Refurbishment of business premises(deductible over five years of assessment)
- Patent rights or rights to know-how
Additionally, eligible expenditure on research and development activities can enjoy further deduction. Qualifying items include market, management, and business research, design-related expenses, and educational expenses for technical training programmes. For the initial HKD 2 million, you can claim a deduction of 300%. The amount exceeding the initial HKD 2 million is eligible for a deduction of 200%.
Non-deductible items
- Expenses of a domestic or personal nature and any sums not used for generating profits
- Capital withdrawals or losses
- Any sums that can be reclaimed through insurance or a contract of indemnity
- Expenses, including rental fees, incurred in the occupation or use of premises that are not used for generating profits
- Taxes that you are obligated to pay under the Inland Revenue Ordinance, with the exception of salaries tax paid for employees’ renumeration
- Contributions made to your spouse’s mandatory provident fund scheme
Losses
In an accounting year, any losses incurred can be carried forward and used to offset against future profits in respect of the same trade. If you carry on more than one trade, losses in respect of one trade can be offset against profits derived from another trade. Losses cannot be carried back.
If you are eligible for preferential tax treatment under a concessionary regime, there are specific provisions in place that govern the adjustment of losses between trading activities subject to the reduced tax rate and those that are subject to the normal tax rate.
In Hong Kong, there is no provision for group relief of losses. This means that losses cannot be transferred between entities within the same corporate group.
Depreciation allowances
- Plant and machinery
- A 60% initial allowance of the cost of plant and machinery in the tax year that it was purchased
- Annual allowances of 10%, 20%, or 30% (depending on the type of plant or machinery and its corresponding estimated working life) on the diminishing value of the asset
- Commercial buildings and structures
- A 4% annual allowance of the expenditure incurred on the construction of commercial buildings or structures
- Industrial buildings and structures
- A 20% initial allowance of the expenditure incurred on the construction of industrial buildings and structures used in qualifying trades, including farming, transport, dock, and water and electricity undertakings
- A 4% annual allowance of the expenditure until it is written off
When is the tax filing deadline?
A year of assessment, also known as a tax year, begins on 1 April and ends on 31 March of the following calendar year. Companies, however, have the flexibility to select their own accounting year-end dates as they deem fit.
Although profits tax returns are usually issued to taxpayers on 1 April every year, newly established companies will receive theirs 18 months from the date of incorporation. You must submit the tax return together with your audited accounts and completed supplementary forms about any applicable tax incentives to the IRD. The filing deadline is normally one month from the date that the return is issued.
What is the provisional profits tax payment?
Profits tax is imposed on your assessable profits arising over the course of a given tax year. Since your assessable profits cannot be determined until the end of the relevant year, a provisional charge is levied instead. To be settled in two instalments, the provisional charge is an estimated figure based on the preceding tax year’s actual assessable profits. The initial payment covers 75% of your total tax liability, while the remaining 25% is due for payment after three months.
Once your actual assessable profits are ascertained at the end of the tax year, any profits tax you have overpaid will be used to offset against the provisional charge in the following tax year.
Is double taxation relief available?
The territorial basis of Hong Kong corporate income tax already functions as an effective mechanism for providing unilateral relief from double taxation, as offshore-sourced income is usually not chargeable to profits tax.
As of August 2023, Hong Kong has comprehensive double taxation agreements with Austria, Belarus, Belgium, Brunei, Cambodia, Canada, the Czech Republic, Estonia, Finland , France, Georgia, Guernsey, Hungary, India, Indonesia, Ireland, Italy, Japan, Jersey, Kuwait, Latvia, Liechtenstein, Luxembourg, Macao SAR, Mainland China, Malaysia, Malta, Mexico, the Netherlands, New Zealand, Pakistan, Portugal, Qatar, Romania, the Russian Federation, Saudi Arabia, Serbia, South Africa, South Korea, Spain, Switzerland, Thailand, the UAE, the UK, and Vietnam.
What can CW do for you?
Understanding tax has always been a challenging and intricate task. But it need not be so. We can assist you in navigating the complexities of Hong Kong taxation, enabling you to focus on growing and developing your business.
With over thirty decades of professional expertise, our team of seasoned professionals possesses extensive experience in providing tax advisory services to clients of various sizes and profiles. Our client base spans a broad spectrum of industries, including manufacturing, wholesale, retail, real estate, information technology, hospitality, logistics, shipping, aviation, and financial services.
Contact us to learn more about the corporate tax implications arising from your business in Hong Kong.
