Neat Team October 24, 2020 1:59 pm

Hong Kong tax basics for startups & entrepreneurs

This is a guest post by Bridges Executive Centre

In the blink of an eye, it’s the middle of the year. You should now start reviewing business plans and any local compliance duties that might affect your company’s operations. This is especially important for foreign entrepreneurs and startups. Don’t forget the principle “the earlier the better”. This is key when talking about tailoring your tax strategies and preparing to report your taxes to the Inland Revenue Department (IRD) on time.

Commencing from the year of 2018/19 (i.e. business conducted on or after 1 April 2018), the HK profits tax rate will be reduced from 16.5% to 8.25%. This is according to the newly proposed two-tier profits tax system. In this system, the tax rate for the first HK$2 million of profits is being halved to 8.25%. For profits exceeding that amount you will be able to keep 16.5%. This new measure will provide a huge tax relief to start-ups, SMEs, and international entrepreneurs, provided that 8.25% is an extremely low profits tax rate compared to other markets.

No clues yet on where to start? Let’s take a closer look at some tax filing and planning basics you should pay attention to if you have a business in HK.

Get familiar with compliance

There are 3 types of annual tax returns the IRD will issue to entrepreneurs doing business in HK for more than 1 year since the date of incorporation: Employer’s Return, Profits Tax Return, and Individual Tax Return. Different tax returns have different kinds of compliance requirements. Taking Employer’s Return as an example, there are several types of documents you are required to file for your employees:

  • Completed Form BIR56A and IR56B (Employer’s Return of Remuneration and Pensions)
  • Completed Form IR6036B (Remuneration Paid to Persons Other Than Employees)

You might feel dizzy seeing all these requirements and a little nervous that some of them might be filled incorrectly. In the worst case, they will reject your tax return.

If you are not familiar with HK tax compliance you can save time and headaches if a professional and experienced agency manages all your tax filing duties. The HK tax regime is rather simple. However, its documentation filing requirements are relatively rigorous due to the well-developed regulatory system.

Accurateness and effectiveness

Keep in mind: if your accounts and audit reports are not built properly from the beginning, it is not easy to implement an effective tax plan to minimize your taxes when you start making good profits at a more mature stage. Some people think they can prepare simple bookkeeping records themselves for their business since they don’t have many resources. This is a misconception – provided that every HK business is required to submit audit reports to the Government every year. If the full set of accounts including Profit & Loss Accounts, Balance Sheet, General Ledger and Trial Balance is not available for the auditors to assess, they can’t finish the auditing procedure and are unable to give any advice on tax compliance strategy and submit the audit report.

Getting a reliable accounting service provider to help is not as hard (and expensive) as you think. You can review the whole financial picture of your business in advance and receive an estimate of taxes to be paid if you manage your accounts and audit reports at an early stage,. You will also be able to conduct your business and set up your financial strategies in the most tax-efficient manner.

Financial accurateness and optimisation should not be the only focus; timing and deadlines are also a key element.

You do not want to face penalties or prosecution due to the late submission of tax returns; most agencies will send you reminders and related advice on your upcoming tax reporting date. This will ensure you never miss a deadline.

Generally, the IRD will issue 3 types of tax returns to each entrepreneur every year after the very first return has been issued: Employer’s Return, Profits Tax Return and Individual Tax Return. The IRD will issue Employer’s Return and Profits Tax Return on the first working day of April every year. They will also issue Individual Tax Return on the first working day of May every year. Generally it requires you to complete your tax filing within 1 month from the date of issue. For people who have just formed a HK company, they should expect to receive their first Profits Tax Return in around 18 months after the date of incorporation, and they will have a special 3 month submission period for filing this first ever Profits Tax Return together with their first audit report.

Tax exemption for offshore companies

As one of the most flourishing markets in the world, HK has attracted a lot of overseas investors. Some of them might be running an offshore business where the operations do not take place in HK.  How can the IRD regard your company as an ‘offshore business’? How can you enjoy tax exemption? To put it simply, to qualify certain criteria must be met. For example:

  • The purchase and sales contracts are completely negotiated and conducted with suppliers and customers outside HK
  • The service is performed in a place wholly outside HK

While your business might be conducted entirely outside of Hong Kong, an important factor is to prove it, so the profits are not liable to HK Profits Tax. In order to prove offshore status to the Hong Kong government, it’s important to document everything and conduct proper planning at the initial stage. Click here for details on qualifying for the ‘offshore claims’ submission.

There are plenty of tax compliance issues that could be affecting your final tax reporting and optimisation results.

If you’re new to doing business in Hong Kong, finding an agency with years of experience and a solid foundation might help.

You can contact Bridges for more information.

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