Under the "Inland Revenue Ordinance" from Inland Revenue Department (IRD), profits taxpayers mean persons, including corporations, partnerships, trustees and bodies of persons that profit from carrying on trade, profession or business in Hong Kong.
Scope of Charge
Profits arising in or derived in Hong Kong from operating any business or service are subject to tax (except profits arising from or losses incurred by the sale of capital assets). In contrast, no tax is levied on profits arising abroad, even if they are remitted to Hong Kong. Whether business is operated in Hong Kong and whether profits are derived from Hong Kong are mainly determined by operating facts.
If a person sells his/her building or any property as part of a scheme of profit-making, it will be regarded as a "business" and he/she is required to pay tax on any profit he/she may make.
Profits Tax Rate
- Profits tax rate for a limited company is 16.5%
- Profits tax rate for sole proprietorship or partnership is 15%
Reduction of profit tax
- Per 2013/14 Budget, 75% of the 2012/13 profits tax will be waived subject to a ceiling of $10,000 per case.
- 75% of the 2011/12 profits tax is waived subject to a ceiling of $12,000 per case.
The financial year generally ends on 31 March or 31 December of each year, with a 12-month accounting period. However, the first accounting period for a newly set up company cannot exceed 18 months.
All expenses incurred by the taxpayer in the production of chargeable profits, to the extent that they are related to the operation, deductions which include:
- Loan interests
- Bad debts and bad loans
- Repair fee or repair charge
- Research and development expenditure
- Registration fee for royalty, design and patent
- Purchase expenditures on royalty, design and patent used in Hong Kong
- Education expenditures pursuant to the business paid to the accreditation bodies
- Charitable donation in conformity with provisions
- The contribution of the employer in the beginning of the recognized occupational retirement schemes or special contribution may be deducted in five years, and the upper deduction limit of each year's defined contribution is 15% of the employee's annual salary.
- As for sole proprietors or partners of a partnership, the upper limit of deduction from mandatory contribution paid in as self-employed persons is 18,000 HKD per person in accordance with the legal liability stated in the Mandatory Provident Fund Schemes Ordinance.
In calculating the profits, deduction is specifically prohibited with respect to the following:
- Family or private expenses and any other expenses not intended for assessable profits
- Investments for improvement and any expenses of capital in nature
- Depreciation or amortization of fixed assets
- Recoverable expenses according to an insurance plan or contract of indemnity
- Rent and related expenses arising from building occupation, not for the purpose of assessable profits
- Various kinds of taxes paid in according to Inland Revenue Ordinance, except for salaries tax arising in paying salaries to employees or board directors
- Salaries, capital interests and loan interests paid to the sole proprietor or his/her spouse and the partner of a partnership or his/her spouse
- Contribution or provision as per unrecognized occupational retirement schemes
Provisional Profits Tax Payment
Before a given tax year ends, the Inland Revenue Department (IRD) will impose provisional profits tax on enterprises according to the tax payment assessed in the previous year. In the succeeding year, when the tax payment for the related year is appraised, the provisional tax paid will be used to pay the profits tax payable in that year.
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