For companies operating in the bustling business hub of Hong Kong, understanding the tax landscape is vital to maintaining financial compliance. One crucial aspect of Hong Kong's tax system is Profit Tax, levied on the net profits of companies, businesses, and trade operations carried out within the city.
What is considered Taxable Profit in Hong Kong?
Taxable profits encompass the net profits derived from Hong Kong sources. These include:
- Trading Profits: Income earned from business activities and trade operations conducted within Hong Kong.
- Profits from Services: Income generated from providing services within the city.
- Profits from Property: Gains from the sale of property and rental income.
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Interest, Dividends, and Royalties: Income from these sources, subject to specific provisions.
How much is the corporate tax?
The Profits Tax rates for corporations and unincorporated businesses are 16.5% and 15% respectively from the year of assessment 2008/09 onwards. With effect from the year of assessment 2018/19, the tax rates for the first $2 millions of assessable profits for corporations and unincorporated businesses eligible for two-tiered tax rates are lowered to 8.25% and 7.5% respectively.
How to declare the company’s profits?
In Hong Kong, companies are required annually to file a document called PTR, detailing their income, expenses, and profits for the financial year. These returns provide the Inland Revenue Department (IRD) with essential financial data to assess a company's tax liability.
Types of Profits Tax Returns
There are 3 series of Profits Tax return forms. You may download a specimen of the tax return forms for reference, but you should not use a printed copy of the specimen form for filing purposes.
- Profits Tax Return - Corporations (BIR51)
- Profits Tax Return - Persons Other Than Corporations (BIR52)
- Profits Tax Return - In Respect Of Non-Resident Persons (BIR54)
Profit Tax Return filing deadline
Generally, Profits Tax return and any required supplementary forms and other forms (IR1478 & IR1479) should be filed within 1 month from the date of issue. The compliance date of submission is specified on page 1 of the Profits Tax return.
To promote electronic filing, the Department will grant, on application, a further extension of 1 month after the normal due date subject to the condition that Corporations and Partnership Businesses will file the Profits Tax returns through the Internet. Please go to Completion of Profit Tax Return for the conditions that a corporation and a partnership must satisfy in order to use the Internet filing service.
Application for Extension for the Submission of Return
As a general rule, a further extension of time beyond the extended due dates under the Block Extension Scheme will only be granted in the most exceptional circumstances. Any request for such extension should be made in writing with an explanation of why lodgement cannot be made in a timely manner, together with supporting evidence.
You should not assume that any further extension will be granted.
Tax payment
After submitting the PTR, the IRD evaluates a company's tax liability based on the information provided. This assessment determines the actual amount of Profit Tax owed by the company for a particular financial year, and is presented to the company under a form of a PTA - Profit Tax Assessment.
According to the amount of tax payment, the IRD may allow the taxpayer to a instalment payment (usually 2 instalments).
Is it possible to pay taxes in more than 2 instalments?
Yes, taxpayers having financial difficulties in settling their tax bills on time may apply to the Inland Revenue Department (IRD) for payment of tax by instalments.
Please note that a surcharge of not exceeding 5% on the amount outstanding after the due date may be imposed. A further surcharge of not exceeding 10% may also be imposed on the amount remaining unpaid (including 5% surcharge already imposed) after six months from the due date.
The application must be filed to IRD by form, together with the below supporting documents:
- A payment proposal;
- Copies of their bank statement / passbook for the latest 3 months;
- Details of their income and expenditure for the past 3 months;
- For businesses, the latest 3-month management accounts (including profit and loss account and balance sheet), the cash flow position and forecast;
- Daytime contact telephone number.
Provisional Tax Estimated Assessment (PTEA)
Sometimes, a company may receive a request of Provisional Tax Assessment. Why do companies in Hong Kong receive Provisional Tax Estimated Assessment (PTA)? The answer lies in the principle of timely tax collection. Hong Kong operates on a "pay-as-you-earn" basis, meaning that companies are required to pay their taxes during the year in which they earn the income, rather than waiting until year-end.
This is where PTEA comes into play. The IRD uses IT to estimate a company's tax liability for the current financial year based on its past performance. The goal is to ensure a steady flow of tax revenue throughout the year, rather than waiting for the end of the financial year to settle the tax bill.
Exceptions and Adjustments
It's important to note that PTEA is not a fixed, unalterable amount. Companies have the opportunity to make adjustments if they anticipate significant changes in their financial situation, such as decreased profits or increased expenses. The IRD provides guidelines and channels for companies to communicate such changes and revise their Provisional Tax Assessment accordingly.
Time Limit for Application
Your application for holding over of provisional tax should be lodged not later than:
- 28 days before the due date for payment of the provisional tax, or
- 14 days after the date of issue of the notice for payment of the provisional tax.
whichever is later.
If the provisional tax is payable by two instalments and the first instalment has been settled by the due date, an application for holding over of the whole or part of the second instalment may be made subject to the prescribed time limit and grounds for application. Details about the time limit for applying for holdover of provisional tax can be found in the following link.
Grounds for Application of Provisional Profits Tax
An application for holding over of provisional profits tax may be made on one of the following grounds:
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Your assessable profits for the year of assessment are, or are likely to be, less than 90% of the assessable profits for the year preceding the year of assessment or of the estimated sum in respect of which you are liable to pay provisional profits tax.
Supporting documents including properly signed draft accounts covering a period of not less than 8 months should be submitted together with the application.
- The amount of any loss brought forward for set off to that year of assessment has been omitted or is incorrect;
- You have ceased, or will before the end of the year of assessment cease, to carry on your trade, profession or business and that the assessable profits for that year of assessment are, or are likely to be, less than the assessable profits for the year preceding the year of assessment or of the estimated sum in respect of which you are liable to pay provisional profits tax;
- You have elected to be personally assessed for the year of assessment for which provisional tax was charged, and the election is likely to reduce your liability to tax;
- You have objected to your assessment for profits tax for the year preceding the year of assessment for which provisional tax was charged.
Conclusion
Finally, negotiating the complexities of Profit Tax in Hong Kong is a critical component of financial compliance for firms operating in this vibrant city. It is critical to understand what constitutes taxable profit, the tax rates, and the declaration process.
If you need assistance with Profit Tax matters or have questions about tax regulations in Hong Kong, don't hesitate to contact us for expert guidance and support.