Under the "Inland Revenue Ordinance" from Inland Revenue Department (IRD), profits taxpayers mean persons, including corporations, partnerships, trustees and bodies of persons that profit from carrying on trade, profession or business in Hong Kong.
Scope of Charge
Profits arising in or derived in Hong Kong from operating any business or service are subject to tax (except profits arising from or losses incurred by the sale of capital assets). In contrast, no tax is levied on profits arising abroad, even if they are remitted to Hong Kong. Whether business is operated in Hong Kong and whether profits are derived from Hong Kong are mainly determined by operating facts.
If a person sells his/her building or any property as part of a scheme of profit-making, it will be regarded as a "business" and he/she is required to pay tax on any profit he/she may make.
Profits Tax Rate
- Profits tax rate for a limited company is 16.5% (2007/18:17.5%)
- Profits tax rate for sole proprietorship or partnership is 15% (2007/18:16% )
Reduction of profit tax
- Per 2013/14 Budget, 75% of the 2012/13 profits tax will be waived subject to a ceiling of $10,000 per case.
- 75% of the 2011/12 profits tax is waived subject to a ceiling of $12,000 per case.
The financial year generally ends on 31 March or 31 December of each year, with a 12-month accounting period. However, the first accounting period for a newly set up company cannot exceed 18 months.
- Dividends or investment yield received from companies that have paid profits tax are not included in assessable profits
- Interest received on the deposits placed in authorized institutions is exempt from profits tax
All expenses incurred by the taxpayer in the production of chargeable profits, to the extent that they are related to the operation, deductions which include:
- Interest expenditure on borrowings for the purpose of producing the profits
- Bad and doubtful debts
- Research and development expenses
- Directors' emoluments
In calculating the profits, deduction is specifically prohibited with respect to the following:
- Any sums not expended for the purpose of producing profits
- Any loss or withdrawal of capital, the cost of improvements and any expenditure of a capital nature
- Any loss recoverable under an insurance scheme or a contract of indemnity
- Rent of or expenses relating to vacant premises or used for the purpose of producing the profits
- All taxes paid
- Traffic penalties payable due to breach of laws
Provisional Profits Tax Payment
Before a given tax year ends, the Inland Revenue Department (IRD) will impose provisional profits tax on enterprises according to the tax payment assessed in the previous year. In the succeeding year, when the tax payment for the related year is appraised, the provisional tax paid will be used to pay the profits tax payable in that year.
- The initial depreciation accounts for 60% of capital expenditure in the purchase of machinery, instruments, equipment and other assets
- Expenditure incurred in the purchase of computer hardware and software will be fully deducted according to facts
- Capital expenditure incurred in the renovation of commercial buildings is allowed to deduct over a period of 5 years
- If Hong Kong enterprises have goods processed by Mainland China companies through "contract processing" in China, then only 50% of the profits are assessed from a Hong Kong source, which are subject to profits tax