Profit Tax and Income Tax Returns in Hong Kong
According to the Hong Kong Inland Revenue Ordinance (“IRO”) s.14 provides that, if all the following conditions fulfill, there is a responsibility to pay profits tax / income tax in Hong Kong:
(1) Any person (including a corporation, company, partnership, trustee or a group of persons) carries on trade, profession or business in Hong Kong;
(2) Through trade, profession or business, obtain assessable profits (except for sale of capital or assets);
(3) The profit is arising in or derived from Hong Kong.
There is no difference between resident or non-resident person for charging tax. So the place of incorporation of a company will not be used to determine whether or not income tax needs to be paid. Therefore, the local resident need not pay tax for income obtained from overseas; however, a non-resident who earns profits in or derived from Hong Kong is required to pay the profit tax. As to whether the business operates in Hong Kong and whether the profits are derived from Hong Kong, the determination base is a matter of fact that it can be referred from the principles adopted by the Privy Council in Hong Kong courts and the judgment of the tax cases.
Hong Kong’s taxation and returns process
Deductible Expenses
The basic principle is that tax-payers pay expenses for the purpose of earning profits; these expenses are deductible.
Non-deductible Expenses
(1) Domestic or private / personal expenses generated or spent that are non for the purposes of earning assessable profits;
(2) Any capital loss or withdrawal for the purpose of cost saving or any capital expenditure expense in nature.
Profits tax rate
Currently, Hong Kong companies' net profits tax rate is 16.5%
Provisional profit tax / Advance profit tax
Profits tax is charged based on each year of assessment and shall be levied on profits assessable subject to the amount at the end of the relevant year. The IRD will therefore, on or before end of the relevant year, assess the provisional tax. IRD subsequently assess for the year of assessment the assessable profits, the provisional tax paid will be used to offset the profits tax assessed. So when the IRD assesses the tax for the year, the company will at the same time have to prepay the tax for the next year.
Anti-avoidance provisions
"IRO" s.61 provides that, where the assessor consider the causes or any reason that may cause person in any transaction to reduce the tax payable is artificial or fictitious, or if there is any disposition which is not in fact implemented, the assessor may disregard the transaction or disposition, and the respective amount will be assessed accordingly.
According to "IRO" s. 61A, any transaction completed on or after 13 March 1986, the transaction is sole for the main purpose of enabling the persons concerned to obtain a tax benefit, the assistant assessor shall assess the relevant person’s taxes as if the transaction had not been entered into or implemented; or such other manner as the assistant assessor thinks fit to eliminate the transaction and the tax benefit obtained.
"IRO" s. 61B is used to limit the use of corporation in loss for tax avoidance practices. This provision is for those corporations which have accumulated losses and are used for set off those profits. Shareholder or ownership of the corporation in loss once changed, new shareholders may retain the losses for those profitable businesses, the use of accumulated losses to offset the profits. If the Commissioner is satisfied that the change in the ownership of shares or principal is for the purpose of utilizing the balance of accumulated losses and obtain tax benefit, the Commissioner of IRD has the right to refuse to offset the loss of profits under this provision, thereby limiting the practice of these tax havens.
To learn more about income or profit taxes and the return process in Hong Kong, please don’t hesitate to get in touch with us.