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Hong Kong Taxation

Profits Tax

Taxpayers

According to the "Inland Revenue Ordinance", profits taxpayers stands for persons,
includes corporations, partnerships, trustees and bodies of persons that obtains profit
 from any business in Hong Kong. There is no different between residents and non-residents.

The Scop of the Cherge

1
Any person, includes corporations, partnerships, trustees and bodies which carrying on any business, profession or business in Hong Kong are chargeable to tax on all profits (excludes profits arising from the sale of capital assets) arising in or derived from Hong Kong from such trade, profession or business.
 
 
 
1
There is no different between residents and non-residents. The profits of a resident derived from abroad should not pay tax, but the profit of non-resident derived in Hong Kong should pay tax.
 
1
The question of whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong is largely one of fact, however some guidance on the principles applied can be found in cases which have been considered by the Hong Kong Courts and the Privy Council.
 
 
1 No tax is levied on profits arising abroad, even if they are remitted to Hong Kong.
1
If a person sells his flat or any property as part of a scheme of profit-making, it will be regarded as a business and he is required to pay tax on any profit he may make.

Profits Tax Rates

(1) Normal rate (for the year of assessment 2008/09)


1 Corporations 16.5%
1 Unincorporated Businesses 15%
(2)
 Concessionary rate
 
A tax rate at 50% of the normal profits tax rate will be applied to trading profits and interest income received or derived from qualifying debt instruments issued in Hong Kong, and to offshore business of professional reinsurance companies.

All taxpayers are subject to the same corporation or unincorporated business tax rate irrespective of their residential status.



Basis Period


The Basis period is either:-

(1)
The year ended 31 March during the relevant year;

(2)
Where the annual accounts are made up to any day other than 31 March, the year ended on that day in the relevant year;

(3)
Where the accounts are made up for each lunar year, the lunar year ended in the relevant year;

(4)
Where you commenced or ceased to carry on a business or changed its accounting date, the special period prescribed by sections 18C, 18D or 18E of the I.R.O.;

(5)
For commencement case, if accounts for this period have not been prepared the profits to be returned may be calculated by apportioning the profits shown by the accounts which cover the period; or

(6)

 For cessation/transfer of business case, special rules apply:-

 

  1

Where the business does not cease but, in whole or in part, is transferred to or carried on by another person;

 

  1

In the case of cessation occurring on or after 1 April 1979 of a business which commenced before 1 April 1974.

Exemption


The following income and profits are excluded from the assessable profits:-

1 Dividends received from a corporation which is subject to Hong Kong Profits Tax;
1
Amounts already included in the assessable profits of other persons chargeable to Profits Tax;
1
Interest on Tax Reserve Certificates;
1
Interest on, and any profit made in respect of a bond issued under the Loans Ordinance (Cap. 61) or the Loans (Government Bonds) Ordinance (Cap. 64), or in respect of an Exchange Fund debt instrument or in respect of a Hong Kong dollar-denominated multilateral agency debt instrument;
1
Interest income and trading profits derived from long term debt instruments; and
1

Sums received or accrued in respect of a specified investment scheme by or to the person as: -


(i)

A person chargeable to Profits Tax in respect of a mutual fund, unit trust or similar investment scheme that is authorized as a collective investment scheme under section 104 of the Securities and Futures Ordinance (Cap. 571); or


(ii)

A person chargeable to Profits Tax in respect of a mutual fund, unit trust or similar investment scheme where the Commissioner is satisfied that the mutual fund, unit trust or investment scheme is a bona fide widely held investment scheme which complies with the requirements of a supervisory authority within an acceptable regulatory regime.


Interest Income Exemption from Payment of Profits Tax
Interest (accrued on or after 22 June 1998) derived from any deposit placed in Hong Kong with an authorized institution is exempt from payment of Profits Tax. This exemption, however, does not apply to interest received by or accrued to a financial institution.

Deductions


Deductible Expenses

 1
All outgoings and expenses, to the extent to which they have been incurred by the taxpayer in the production of chargeable profits, are allowed as deductions.
 1
A transfer of certain allowable head office administrative expenses by means of a charge to a local branch or subsidiary in Hong Kong would be allowed as a deduction for Hong Kong tax purposes, to the extent to which they were incurred during the basis period for the year of assessment in the production of profits chargeable to tax.

Non-deductible Items


In computing the assessable profits deduction is specifically prohibited in respect of

the following:-

1
Domestic or private expenses and any sums not expended for the purpose of producing the profits;
1 
Any loss or withdrawal of capital, the cost of improvements and any expenditure of a capital nature;
1 
Any sum recoverable under insurance or contract of indemnity;
1 
Rent of or expenses relating to premises not occupied or used for the purpose of producing the profits;
1 
Taxes payable under the Inland Revenue Ordinance, except Salaries Tax paid in respect of employees' remuneration;
1 
Any remuneration or interest on capital or loans payable to or, subject to section 16AA, contribution made to a mandatory provident fund scheme in respect of the proprietor or the proprietor's spouse or, in case of a partnership, to its partners or their spouses.

Tax Preferences

1
A person who incurs capital expenditure on the renovation or refurbishment of business premises is allowed to deduct that expenditure over a period of 5 years in equal instalments commencing in the year in which the expenditure is made.
1
Expenditure on plant and machinery specially related to manufacturing, and on computer hardware and software, can immediate write off in full is to be allowed.
1
Charitable donations made to approved charitable institutions or trusts of a public character or to the Government of the Hong Kong Special Administrative Region, amounting in aggregate not less than $100 but not exceeding 35% (25% for year of 2007/08) of the assessable profits, are allowable for deduction from the assessable profits.

Depreciation Allowances


(1)

Industrial Buildings Allowances on Industrial Buildings and Structures

 

   1

Initial allowance: 20% on the cost of construction of the premises

 

   1

Annual allowance: 4% on the cost of construction of the premises

 

   1

Balancing allowance or charge will be due upon disposal of the premises

 


(2)

Commercial Buildings Allowances on Commercial Buildings and Structures

 

   1

Annual allowance: 4% on the cost of construction of the premises

 

   1

Balancing allowance or charge will be due upon disposal of the premises

 


(3)

Plant and Machinery

 

   1

Initial allowance: 60% on the cost

 

   1

Annual allowance: at rates of 10%, 20% or 30% as prescribed by the Board of Inland Revenue in the Inland Revenue Rules, on the reducing value of the asset. Items qualifying for the same rate of annual allowance are grouped under one "pool".

 

   1

A balancing allowance is available only on cessation of a business to which there is no successor. A balancing charge can, however, arise whenever the disposal proceeds of one or more assets exceed the reducing value of the whole "pool" of assets to which the disposed items belong.


Provisional Profits Tax


Profits Tax is chargeable on the actual profits of the year. As the profits for any particular

year cannot be known until after the year end, a provisional tax charge is raised during

the course of the year. In the following year, when the profits of the previous year are

ascertained an assessment is made and credit given for the provisional tax paid.



(Source: Inland Revenue Department)

The above information is provided for your reference, please visit the website of Hong
Kong Inland Revenue Department for details.


Relevant Services

1
 Provide accounting services (Please refer to Accounting)






For any enquiries, please contact Mr. Ivan Wong at 2317 4045, via fax 2317 4049 or via email.