FAQs about Hong Kong tax for SMEs
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A company registered in Hong Kong has only one tax to pay — the profits tax. That’s true for any company that operates and makes profits in Hong Kong. In this short article, we’ll look at what the profits tax is, the tax rates and the ways to reduce your tax bill.
The information shared here should be taken as a guideline if you have specific questions about your business, please feel free to reach out!
What are the Hong Kong tax rates?
The standard profits tax rate for corporations is 16.5%. However, a company pays a lower tax on the first HK$ 2 million of its profits. Anything that goes above this amount is taxed at a standard tax rate.
A two-tired system is when the tax rate changes under some conditions.
Hong Kong corporate tax rates (since Year of Assessment 2018/19)
Mind that if you earn more than HK $2 million, say, HK $4 million, it does not mean all 4 million are taxed at 16.5%. You still get to pay 8.25% on the first 2 million and only the remaining two are taxed at a higher rate. For example:
Max’s company made HK$3 million of assessable profits. The first HK$2 million are taxed at 8.25%. The remaining HK$1 million is taxed at a rate of 16.5%. So, he paid a total of HK$ 330,000: (2,000,000 * 0.0825) + (1,000,000 * 0.165) = HK$ 330,000
Andrew, a friend of Max, also owns a company in Hong Kong. His company made only HK$1.5 million, and he paid 8.25% of this amount in tax. 1,500,000 * 0.0825 = 123,750.
Limitation: For two or more connected entities under common control, only one of them may profit from the two-tiered profits tax rates.
Entities are “connected” if one person or one corporation has a controlling interest in both of them. If you have a 51% share in a chain of restaurants and a company that provides delivery services, these two businesses are connected entities. You may choose only one of your businesses to be taxed at two-tiered rates.
How do I pay taxes in Hong Kong?
Usually, for the companies that have just registered in Hong Kong, the first return forms come after 18 months since the date of registration. Businesses have 3 months to file them.
After that, the Inland Revenue Department (IRD) issues return forms and tax demand notes every Year of Assessment (YA). It starts on 31 March and ends on 1 April the following calendar year. You’ll receive the forms between November and April. They are due on the first working day of May.
The tax demand note will request for prepayments for the next YA.
Speaking of the forms, IRD issues three of them for every company and its owner:
In April 2019, some supplementary forms were introduced. They cover super-specific cases, like owning a ship, or being a professional reinsurer, or trading with an affiliated company.
After completing the forms, you simply send them back to IRD via post or e-Tax filing system.
Do I have to pay tax in Hong Kong for profit earned overseas?
Taxation in Hong Kong is based on the territorial principle. It means that Hong Kong companies only pay profits tax on profits earned in Hong Kong. When the company’s profits (or any portion of them) come from elsewhere, you can claim a tax exemption on them in Hong Kong.
Take this scenario for example:
Max lives in the US and owns a design studio registered in Hong Kong. In 2018, he only worked with customers from the US. So 100% of his profits came from overseas. Max didn’t pay any tax on those profits in Hong Kong.
In 2019, Max expanded his client base and started working with clients from Hong Kong. By the end of the year, Hong Kong clients brought half of his company’s profits. So, Max paid tax on those profits. The other half that came from the US was not taxable in Hong Kong.
The IRD requires evidence that the profits come from overseas. They check the transactions and activities that brought in those profits, assess all the information you provide, and go through supporting documents.
While in theory this sounds fairly simple, in reality determining the source of profits is a complicated process. Each type of business activity – manufacturing, trading, rental, etc. – has unique guidelines to define the place of origin of the profits.
The IRD currently uses the following principles to determine the source of profits of a business:
Principle 1. Matter of fact: The place of origin of profits depends on the nature of the profits, and of the transactions which give rise to such profits.
Principle 2. The operations test: This is determined by looking at the operations of the business that contributed to the earning of the taxable profit, and where the operations took place.
Principle 3. Antecedent or incidental activities – This principle focuses on establishing the geographical location of the taxpayers’ profit-producing transactions and making them distinct from activities that are antecedent or incidental to profit-producing transactions.
Principle 4. Place where a decision is made – The place where the day-to-day investment/business decisions take place.
Principle 5. Gross profits from transactions – Looking at the gross profits arising from individual transactions, the IRD can make a distinction between Hong Kong profits and offshore profits.
Principle 6. Business presence overseas – Profits earned by a business are likely to be chargeable to Profits Tax in Hong Kong if the main place of business is located in Hong Kong, and there is no business presence overseas [BJ1].
In order to claim offshore profits tax exemption, you will have to submit the claim along with Profits tax return (PTR) and Audit Report.
After the submission of the claim, the IRD will send an enquiry letter(s) asking for detailed information and supporting documents.
Usually they will ask you to submit:
- Proof of correspondence with customers and suppliers
- Travel tickets, visa stamps to demonstrate when and where you visited customers and suppliers
- Purchase orders
- Sales orders
- Shipping documents
It is sensible to present any documentation that proves that the business income comes from outside Hong Kong.
My company is incorporated outside of Hong Kong but I have clients in Hong Kong. Do I have to pay taxes twice?
Double taxation is when one pays taxes twice on the same income in different countries.
Andrew’s company from the previous example is registered in the UK. But all of its profits come from Hong Kong. Every year Andrew pays profits tax in Hong Kong. But he is still liable to pay income tax back home. He thinks that it’s unfair and doesn’t want to pay taxes twice.
Andrew is not the only one who thinks this situation is unfair. Governments of most countries think the same way. That’s why they sign Double Taxation Agreements (DTAs) that prevent people and companies from being taxed twice: at home and abroad.
This story above could have happened to Andrew only before the DTA between the UK and Hong Kong came effective. After that, he and his company have been paying taxes only once, not twice.
Hong Kong has signed DTAs with over 40 countries. See the full list of jurisdictions to see if you are lucky.
In addition, note that DTA terms may differ from one country to another, so be sure to check out the exact terms of your country’s agreement.
With Hong Kong’s increasing network of Double Taxation Agreements/Arrangement (DTAs), the IRD requires companies to show proof of resident status with a Certificate of Resident (CoR) Status. This is a document issued by the Hong Kong competent authority to a Hong Kong resident who requires proof of resident status for the purposes of claiming tax benefits under the Comprehensive Double Taxation Agreements / Arrangements (DTAs). Obtaining a Certificate of Resident Status (CoR) in Hong Kong to utilise the tax benefits under a DTA has become an important part of tax planning for businesses. It’s not a surprise then that the IRD has taken on a stricter approach when reviewing applications for CoR. You can refer to the IRD website to find out which companies can apply, along with the application forms.
What type of companies should incorporate in Hong Kong?
There are many benefits to incorporating in Hong Kong. It is an ideal location for companies that want to expand to Asia or have suppliers in China.
However, don’t let the streamlined tax regime fool you into treating Hong Kong as a tax haven. The government has well-defined rules to ensure that their tax system benefits the businesses who are bringing in value to Hong Kong.
Key Takeaways for SMEs on Paying Tax in Hong Kong
- Profits tax rates are two-tiered: 8.25% on first HK$2million, 16.5% on anything above that limit
- Profits from outside Hong Kong are eligible for tax exemption
- Don’t pay taxes twice on the same income — check out Double tax agreements
Got more questions about Hong Kong tax?
Chartered Accountants from Osome will answer all your questions. Drop them a chat to ask them how to pay your taxes efficiently.