- PROFITS TAX
1.1 Basic principles
The former British Crown Colony, Hong Kong SAR, since the retrocession to the People’s Republic of China (“PRC”) on 1 July 1997 is administered by two pieces of legislation: The Basic Law and the Sino-British Joint Declaration on the Question of Hong Kong. In Hong Kong SAR, the corporate taxation falls under the supervision of the Inland Revenue Department (IRD).
The tax system is based on a territoriality basis, meaning that tax is collected on profits sourced in Hong Kong SAR. In other terms Profits tax is only charged on profits derived from a trade, profession, or business carried on in Hong Kong. The concept of tax resident of a company is therefore not defined legally. The IRD does not distinguish between non-residents and residents when assessing profits tax. However, the tax residency of a company has implication on other matters – such as tax treaties or transfer pricing.
The Assessable Profits are the net profits derived during the basis period in Hong Kong excluding profits arising from the sale of capital assets and other exemptions. The basis period for a year of assessment shall constitute the basis period for that year of assessment, which is normally the financial year ending in that particular YA. Generally, a company determines its basis period with reference to its accounting periods. For example, the basis period for YA2020/2021 for a business closes its accounts on 31 December 2020 is the financial year ending 31 December 2020.
- Filing obligations
The IRD adopts an “Assess First Audit Later” system (AFAL) and base their assessment on the tax return submitted by the company. Every company, partnership or non-resident person who carries out trade in Hong Kong is required to file a profit tax return. The normal filing time is within 1 month form the date of issuance of the profits tax return by the IRD.
In practice the IRD will not issue an annual profit tax return. Some cases can be exempt, for example, when a company does not recognise any assessable profits or when a business has ceased operation. However, upon receipt of the next profit tax return the company or person must comply within the normal requirements.
|TAX FORMS AND DEADLINES|
|Category||Accounting date||Form||Due date|
|Profits tax||Accounting year ends 1 April to 30 November||BIR 51||Manual filing: 30 June FY+1Electronic filing 14 July FY+1|
|Profits tax||Accounting year ends 1 December to 31 December||BIR 51||Manual filing: 17 August FY+1Electronic filing: 31 August FY+1|
|Profits tax||Accounting year ends 1 January to 31 March||BIR 51||Manual filing: 16 November FYElectronic filing: 30 November 2020 FY|
|Profits tax||Newly registered business||BIR 51||The business will receive its first profits tax return some 18 months after the date of incorporation or commencement of business|
- Profit Tax calculation
The applicable income tax rates are shown as the table below:
|Profits derived in Hong Kong by corporations Up to HKD 2,000,000 assessable profitsSubsequent assessable profits|
|Profits derived in Hong Kong by unincorporated businessesUp to HKD 2,000,000 assessable profitsSubsequent assessable profits|
The two-tiered system was implemented in 2018/19 by a law published on the 29th March 2018 ( “Inland Revenue (Amendment) Ordinance (No. 3) 2018”). The aim of the law is to reduce the tax burden of SME and start-ups.
To avoid Group companies to exploit the new amendment, the law specifies for Groups the two tiered tax system can only apply to one of the entities of the group. This rule applies to all “connected entities”. An entity is considered connected if it answers the following criteria:
- One entity is under the control of another
- Both entities are under the control of the same third entity
- Or when in the case of “sole proprietorships” when the company is owned by the same physical person.
The term control is determined by the following criteria:
- Owns or controls 50% or more of the share capital
- Can exercise 50% or more of voting rights of the entity
- Is entitled to 50% or more of the profits or the capital of the entity
B/ Tax deduction on Profits Tax
Generally, tax deduction is allowed for all outgoings and expense wholly and entirely incurred in generating the gross income of a company.
The deductibility of capital expenditure is specified by the provisions of the IRO depending on the type of asset and the nature of the expenditure.
|EXAMPLES OF DEDUCTIBLE EXPENSES|
|Interest on funds borrowed and rent of buildings or land occupied for the purpose of producing profits||Bad and doubtful debts (receivables to be treated as income when received)|
|Repairs of property, plant and equipment used in the production of the profits||Expenditure for registration of a trade mark, design, patent or plant variety right|
|Expenditure on the purchase of specified intellectual property rights for use in the production of profits||Expenditure on R&D, for qualifying expenditure incurred on certain domestic R&D, the first $2M is eligible for 300% tax deduction and the amount beyond $2M for 200% deduction|
|An employer’s annual contribution to a fund under a recognised occupational retirement scheme, or annual premium payment*||Any mandatory contributions paid by a sole proprietor or a partner in a partnership*|
|Royalty, service fees and management fees paid to foreign group companies||Approved charitable donations. The deductions if limited to 35% of assessable profits of the year of assessement|
*Limited in respect of any one employee to 15% of his total emoluments for the relevant period.
**The maximum allowable deduction for each assessment is $18,000.
Source: “A brief guide to taxes administered by the Inland Revenue Department 2020-21”
Depreciation Allowance of Fixed assets
In general depreciation expenses are not tax-deductible. However, capital expenditure linked to the acquisition of fixed assets which is used to generate assessable profit can be deductible. See below for example of these allowances:
- Commercial building: Annual allowance of 4% for Capital expenditure made on the construction of a new commercial building
- Plant and Machinery: Initial allowance of 60% for Capital expenditure during the year of acquisition Subsequent annual allowance of 10%,20%,30 on written down value depending on the type.
- Industrial buildings: Initial allowance of 20% for Capital expenditure made on the construction of a new industrial building during the year of acquisition. Subsequent Annual allowance of 4%
- Computer hardware and equipment: Capital expenditure can be fully deducted during the year of acquisition under certain criteria.
C/ Non-deductible expenses
However, certain expenses are specifically disallowed, included but not limited to the following example:
|EXAMPLES OF NON-DEDUCTIBLE EXPENSES|
|Domestic or private expenses (not used for producing the profits)||Any loss or withdrawal of capital|
|Capital expenditure (included the cost of improving existing capital)||Any sum recoverable under insurance or contract of indemnity|
|Rent for empty premises or not occupied for the purpose of producing the profits||Any remuneration or interest on capital or loans payable|
|Any tax payable under the “Inland Revenue Ordinance” except for salaries tax in regards of the remuneration of employees||Contributions made to a mandatory provident fund scheme in respect of the proprietor or the proprietor’s spouse, or in case of a partnership, its partners or their spouses|
Source: “A brief guide to taxes administered by the Inland Revenue Department 2020-21”
- Tax Losses
Tax losses can be carried forward and set off against future taxable profits of that activity without any restrictions of time. If a company has more than one activity the entity may have losses in one activity offset against profits of the other.
A company can only carry a tax loss forward if during that year of assessment, the company recognised revenue sourced in Hong Kong. If all the assessable profits are offshore then the expenses incurred during the year cannot be carried forward.
- Capital gains
There are no capital gains tax in Hong Kong.
- Transfer Pricing
Hong Kong requirements on transfer pricing documentation are described in Part 9A of the Inland Revenue 2018 Amendment No.6 Ordinance. The requirements are consistent with the OECD’s three-tiered standardized approach.
A Hong Kong entity of a group transacting with entities within the same group is required to prepare a master file and local file (subject to some exemptions).
The notion of “group” includes:
- A single enterprise if it is tax resident in Hong Kong and is subject to tax in another jurisdiction with respect to the business carried out through a permanent establishment.
- The company is required to prepare consolidated financial statements for financial reporting purposes.
- A group who has equity interests in any of the enterprises that is traded on a public securities exchange.
Exemption based on size of the business
A Hong Kong entity which satisfies any two of the conditions below will not be required to prepare a master file and a local file for an accounting period:
- the total amount of the entity’s revenue for the relevant accounting period does not exceed $400 million;
- the total value of the entity’s assets at the end of the relevant accounting period does not exceed $300 million; and
- the average number of the entity’s employees during the relevant accounting period does not exceed 100.
Exemption based on amount of controlled transactions
If the total amount of a type of controlled transactions undertaken by a Hong Kong entity for an accounting period does not exceed the following prescribed threshold, the local file of the entity will not be required to cover that particular type of transactions.
|TYPE OF TRANSACTIONS||AMOUNT|
|Transfers of properties (excluding financial assets and intangibles)||$220 million|
|Transactions in respect of financial assets||$110 million|
|Transfers of intangibles||$110 million|
|Other transactions||$44 million|
- Tax Audit
The Field Audit and Investigation Unit is administered to conduct investigations and field audits on companies and individuals
The IRO requires you to keep sufficient records (in English or Chinese) to enable your assessable profits to be determined. All records must be retained for seven years from the transaction date.
2. INDIRECT AND OTHER TAXES
- Withholding Tax (WHT)
Withholding tax is not applicable to dividend income or interest income. However, Royalties received by non-residents are subject to Withholding Tax. The non-resident entity has to report royalty’s income in the profit tax return form BIR54.
|Type of income||Tax Rate|
|Royalties (Non-treaty)||2.475% to 4.95%|
Royalties tax rate:
There are a two-tiered profits tax rates on royalties paid to non-resident entities applicable in most cases. The rate for the first 6.67 million of gross income is 2.475% and the remaining amount is 4.95%
The responsibility for deducting and paying WHT lies with the non-resident payer.
- Stamp Duty
Ad valorem Stamp duty (AVD) is chargeable on instruments in the case of transfer of immovable property in Hong Kong, the stamp duty (either at scale 1 rates or scale 2 rates) is chargeable based on the sale price or the market value of the property (whichever is higher) at the following rate:
|Transaction type||Stamp duty rate|
|Residential property (after November 2016):Sale price|
|Non-Residential property ( before to November 2020):Sale price less than $2,000,000Sale price above $2,000,000 but beneath $3,000,000Sale price above $3,000,000 but beneath $4,000,000Sale price above $4,000,000 but beneath $6,000,000Sale price above $6,000,000 but beneath $20,000,000Sale price above $20,000,000|
|Non-Residential property (after November 2020):Sale price less than $2,000,000Sale price above $2,000,000 but beneath $3,000,000Sale price above $3,000,000 but beneath $4,000,000Sale price above $4,000,000 but beneath $6,000,000Sale price above $6,000,000 but beneath $20,000,000Sale price exceeds $20,000,000|
For residential property disposed of within 24 months or 36 months, Special Stamp Duty (SSD) will be imposed on top of the (AVD). The amount of SSD is calculated by reference to the stated consideration of the market value of the disposed property at the following regressive rates for different holding periods by the vendor or transferor before the resale or disposal:
|Holding Period||Special stamp duty|
|6 months or less||20%|
|More than 6 months but for less than 12 months||15%|
|More than 12 months but for 36 months or less||10%|
Transfer of Hong Kong Stock
For Hong Kong stock, stamp duty is calculated as follows:
|Nature of document||Rate|
|Contract note for sale or purchase of Hong Kong stock||0.1% of the amount of the consideration or of its value on every sold note and every bough note|
|Transfer operating as a voluntary disposition inter vivos||$5 + 0.2% of the value of stock to be transferred|
|Transfer of any kind||$5|
3. PERSONAL TAX
- Scope of the charge
The tax on revenue is charged on all income sourced from an employment, office or pension from Hong Kong. Similar to profit tax taxable income follows a territoriality principle. The taxable income is not based on the residence status of an individual but on whether the income is derived from Hong Kong.
In deciding whether an income is derived from Hong Kong it is required to identify the location of the source of income. However, some services rendered on the territory can be exempted from salaries tax.
Salary tax exemption:
A non-Hong Kong or Hong Kong resident can be exempt from salary tax for services provided in Hong Kong under certain conditions. The individual providing the income generating services must not stay more than 60 days in Hong Kong in the year of assessment.
- Basis of Assessment
The individual tax obligation is based on the chargeable income of the year of assessment. A year of assessment means a 12-month period from 1st of April to 31st of March. Therefore, the liability can only be established once the 12month period has ended. As a result, during the year of assessment the tax authorities will demand for a payment of Provisional Salaries Tax and adjust the payment the following year. Any excess payment will be applied to the following year’s provisional tax liability and vice versa.
For example, a taxpayer who started an employment on 1st August 2020 and derived chargeable income for 8 months during the year of assessment 2020/21, will be charged provisional tax for the year of assessment 2021/22 and the estimated chargeable income will be grossed up to 12 months.
However, after receiving the tax assessment if the taxpayer’s chargeable income has reduced by more than 10% (for example the tax payer receives the tax assessment in January 2021 but ceased to be employed in October 2020), then the individual can apply for a holdover of provisional tax.
- Scope of Taxable Income
In general, the chargeable income includes the following:
|Cash Remuneration||Perquisites||Benefits-in-kind||Additional Contributions4|
|Wages/SalariiesFeesCommissionsBonusGratuities Leave pay Gratuities Salaries tax paid by the employer||Travel allowance Meals allowanceAccommodation allowance1Phone allowanceEducational benefitsEtc…||HouseholdMotorcarTuition feesDriver & domestic servant SubscriptionsLeave passageEtc…||Contributions to unapproved pension/provident fund|
1 The value included is capped at 10% of the total income of the taxpayer. Only the actual amount paid to the landlord is capped at 10%. If the 1st of the accommodation allowance will be taxed as a standard cash benefit.
- Taxation of resident individuals
The income tax is imposed at progressive rates.
Chargeable Income Position(HKD)
|Tax payable on each bracket (HKD)||Accumulated Tax payable(HKD)|
|Up to 50,000||2%||1,000||1,000|
|50,001 to 100,000||6%||3,000||4,000|
|100,001 to 150,000||10%||5,000||9,000|
|150,001 to 200,00||14%||7,000||16,000|
- Personal reliefs
Personal reliefs are deductions which can be set off against the total income of an individual taxpayer. These are summarized in the table below (non-exhaustive list):
|Type of relief||Amount (HKD)||Type of relief||Amount (MYR)|
|Individual||132,000||Elderly residential care expenses||100,000|
|Spouse*||132,00||Mandatory contributions to recognised retirement scheme||18,000|
|Per child under the age of 18||120,000||Health insurance premiums**||8,000|
|Per parent/grandparent||25,000||MPF Voluntary contributions**||60,000|
|Disabled person||75,000||Approved charitable donations***||7 000|
|Expenses of self-education||100,000||Home loan interest****||100,000|
* If they opt for joint assessment
** Qualifying premiums paid under Voluntary Health Insurance Scheme (VHIS)
*** The limit of the deductibility of charitable donations is capped at 35% of the income after allowable expenses.
**** Must be primary home and located in Hong Kong
Source: “A brief guide to taxes administered by the Inland Revenue Department 2020-21”
- Property Tax
Property tax is applied at the standard rate of 15% on owners of land and/or buildings. The assessable income is derived by the following:
[A] Rental Value
Less [B] Irrecoverable Rent
Less [C] Rates paid by owners
Less [D] Allowance for maintenance and repairs [20% of A – B – C]
Net Assessable Value = A – B – C – D
4. TAX TREATY BETWEEN FRANCE AND HONG KONG
- Exchange of information
The treaty accommodates the latest standards on the exchange of information. Tax authorities from both states will cooperate on Tax issues while safeguarding the rights of the individual tax payer.
- Withholding tax
The treaty reduces withholding tax for interest paid, dividends and royalties. The reduction on interest sourced in France to Hong Kong residents is reduced from 18% to 10%. Next, the rate of withholding tax on royalties sent from France to Hong Kong is reduced from 33.33% to 10%. Finally, the rate on dividends remitted to Hong Kong residents from France, when the royalties are not linked to a permanent establishment in France, is reduced from 25% to 10%.
- Elimination of double taxation
One of the purposes of double taxation agreement is to avoid the double taxation of income by the state of which the taxpayer is a resident. Under the treaty, double taxation will be avoided as the income taxed in Hong Kong shall be allowed as a tax credit to set off French tax coined to such profits.
5. HONG KONG BUDGET 2022-23
5.1 Key measure
- Total additional funding of 67.5 Billion HKD for anti-epidemic needs
- Issuance of consumption vouchers of 10,000 HKD to each Hong Kong permanent resident aged 18 or above
- Total funding of 13.2 Billion HKD to create time-limited jobs in public and private sectors to ease unemployment.
- Profits tax
- The two-tiered profits tax rates for companies (8.25%/16.5%) and unincorporated businesses (7.5%/15%) remain unchanged.
- Propose an 8.25% tax concession for maritime enterprise establishing in Hong Kong.
- Propose tax concessions for eligible family investment management entities by a single-family offices
- Continue discussions regarding the implementation of BEPS 2.0 to ensure Hong Kong’s tax regime is aligned with international consensus.
- Salaries Tax
- The standard tax rate remains unchanged
- The progressive rate remains unchanged
- Propose a tax deduction of HK$100,000 for eligible domestic rental expenses from 2022/23 for tax taxpayers liable to salaries tax or tax charged under personal assessment who do not own any domestic property.
- Proposed one-off measure
- Reducing salaries tax by 10,000 HKD for the year of assessment 2021/22
- Reducing profits tax by 10,000 HKD for the year of assessment 2021/22
- Waive the business registration fees for 2022/23
- Grant each eligible residential electricity account a subsidy of HK$1,000.