All forms of business in Hong Kong including corporations, joint partnerships, and trade bodies are liable to tax on all profits that arise from such business or trade. So many entrepreneurs choose to start a local company in Hong Kong due to Hong Kong’s business-friendly taxation system.
Even more astonishing, however, is that a Hong Kong company can be partially or entirely exempted from tax if the profits in question originate elsewhere. Concerning Hong Kong corporate tax exemption, we aim to help you understand how it works through this article.
Hong Kong Corporate Tax Exemption: What Is Corporate Tax In Hong Kong?
Corporate tax in Hong Kong is the liable tax imposed on a company’s profit. The corporate income tax is also known as corporate profits tax. Every Hong Kong firm must submit a profits tax return together with its audited financial statements to the Inland Revenue Department (IRD).
Annual profits tax returns must also be filed by individuals, single proprietorships, partnerships, and property owners.
Residents and non-residents are treated equally under the territorial concept. Even though you may be residing in Hong Kong, if your income are earned overseas, you are not required to pay taxes. If a non-resident makes money from Hong Kong, they are liable to tax.
A Hong Kong corporation is liable for profits tax under the authority of the Inland Revenue Ordinance (IRO) of Hong Kong if:
- The revenues and profits are generated locally (i.e., in Hong Kong).
- The corporation engages in a trade, profession, or business in Hong Kong,
- The corporate activity generates income.
Hong Kong Corporate Tax Exemption: Features Of The Hong Kong Corporate Tax System
- Territorial tax system
- Low tax rate
- Simple tax structures
- Tax incentives
- No restrictions on company incorporation
- Profit tax exemptions
Hong Kong Corporate Tax Exemption: Hong Kong Corporate Tax Returns
All individuals and companies are obliged to file for their tax returns from the IRD on the 31st March of each year. They must then fill out and submit tax returns back to the IRD within a month, together with any required paperwork.
Extensions of the deadline for filing can be requested, with late filing resulting in penalties being assessed against the firm. Profits tax returns are produced for newly established businesses in Hong Kong within 18 months of the date on which operations began.
Hong Kong Corporate Tax Exemption: Corporate Profit Tax Rate In Hong Kong
Profit tax is assessed based on assessable profits, which are established by removing deductions and revenue not subject to tax. The tax break further lowers it up to a certain amount.
The standard profit tax rate for corporations is 16.5%, and for unincorporated businesses, it is 15%. Beginning with the 2018–19 year assessment, corporations and unincorporated businesses must comply with the two-tiered profits tax system established by the Inland Revenue Ordinance 2018.
Hong Kong has two tax rates for businesses, known as the two-tier taxation system. Profits up to HKD 2 million are subject to an 8.25 percent rate. A rate of 16.5 percent will then be applied to the remaining profits.
For unincorporated firms, a rate of 7.5 percent is applied to the first HKD 2 million. Following that, the rate is 15%. Refer to the table below for the corporate profit tax rates in Hong Kong:
| Assessable Profits | Tax Rate For Corporations | Tax Rate For Unincorporated Businesses |
|---|---|---|
| First HK$2 Million | 8.25% | 7.5% |
| Beyond HK$2 Million | 16.5% | 15% |
Hong Kong Corporate Tax Exemption: What Is Hong Kong Corporate Tax Exemption?
Hong Kong corporate tax exemption is the privilege to exclude part or all of a company’s income from tax in Hong Kong. Hong Kong companies qualify for Hong Kong corporate tax exemption if they meet specific requirements.
Hong Kong uses a territorial taxation system. For example, the tax will only be assessed on earnings from engaging in a trade, company, or profession in Hong Kong.
Therefore, regardless of whether the profits have been transferred to Hong Kong if you operate a business in Hong Kong but your earnings come from somewhere else, you will not be taxed.
Up to HKD 20,000 in profits tax is also exempted in the 2019–20 fiscal year. This implies that a company’s first HKD 242,424 profits will be tax-free since 8.25% of that rate was meant to amount to HKD 20,000.
Similarly, for an unincorporated business with a tax rate of 7.5%, a first profit of up to HKD 266,667 of earnings will be exempted from tax.
Other exemptions based on profits include manufacturing profits while corporate treasury centres are qualified for a tax rate of 50% less than the standard profit tax rates.
Hong Kong Corporate Tax Exemption: How We Can Help?
Our accounting and tax professionals at Premia TNC will guide you on proper documentation to apply for Hong Kong corporate tax exemption. We have qualified and experienced accountants who can handle the complexities of regulatory requirements to ensure a smooth and safe tax filing.
We can also help you with other Hong Kong Company Incorporation services. Our tax experts will work directly with you to minimize your tax liabilities and maximize your tax savings. Reach out to us to get a quote or book consultation with us today
Hong Kong Corporate Tax Exemption – Frequently Asked Questions
What is the base period of income tax?
In Hong Kong, corporate income tax is calculated based on a year of assessment (YA). The year ending 31st March from 1st April the previous year is the year of assessment. The year that concluded on 31st March is the year of Assessment.
Generally, a YA’s assessable earnings are determined by the accounting period ending in that assessment year.
What documents are required to apply for Hong Kong corporate tax exemption?
A corporation must first get an annual financial statement audit from the IRD to apply a profit tax reduction or exemption. Keeping additional pertinent financial records and evidence of transactions that show offshore trade or activity is also needed.
Statements, invoices, and contracts are all evidences of offshore activities. We also advise you to add items like phone logs, meeting minutes, or completely detailed travel logs.
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