HONG KONG PROFITS TAX
Scope of Charge
Persons, including corporations, partnerships,
trustees and bodies of persons carrying on any trade, profession
or business in Hong Kong are chargeable to tax on all profits (excluding
profits arising from the sale of capital assets) arising in
or derived from HK from such trade, profession or business.
There is therefore no distinction between residents and non-residents.
Profits of unincorporated businesses are currently chargeable
at 15% and corporation at 17.5%.
Basis of Assessment
Tax is charged on the assessable profits for a year of assessment.
The assessable profits for the business which makes up annual
accounts are calculated on the profits of the year of account
ending in the year of assessment. In the year
of assessment, a provisional charge to tax is to be paid based
on the profits assessed for the preceding year. The
provisional payment is applied in the first instance against
Profits Tax payable on assessable profits for that year of
assessment when agreed in the following year, any excess is
then applied against the provisional Profits Tax payable for
that succeeding year.
On cessation of a business, subject to certain circumstances
where special treatment would apply, in general the assessable
profits are based on the profits for the period from the end
of the basis period for the previous year of assessment to
the date of cessation.
Exemptions and Deductions
Dividends received are excluded from the assessable profits
of the recipient, and there is an exemption from payment of
tax on interest (accrued on or after 22 June, 1998) derived
from any deposit placed in HK with an authorized institution
(not applicable to interest received by or accrued to a financial
institution).
Generally, all expenses, to the extent to which they have
been incurred by the taxpayer in the production of chargeable
profits, are allowed as deductions including :-
1. Interest on funds borrowed (provided certain conditions
are satisfied) and rent of buildings or land occupied for
the purpose of producing the profits.
2. Bad and doubtful debts (any recoveries to be treated as
income when received).
3. Repairs of articles, premises, plant and machinery used
in producing the profits.
4. Expenditure for registration of a trade mark, design or
patent and expenditure on the purchase of patent rights or
rights to any know-how for use in HK in the production of
chargeable profits. No deduction is, however, allowable
in respect of patent rights or rights to any know-how purchased
by a person wholly or partly from an associated or related
person.
5. Expenditure on scientific research including market, management
and business research and payments for technical education
subject to certain rules.
6. An employer's annual contribution to a fund under a recognized
occupational retirement scheme, or annual premium payment
in respect of a contract of insurance under such a scheme,
or any provision for these purposes, but limited in respect
of any one employee to 15% of his total emoluments for the
relevant period.
In computing the profits deduction is specifically prohibited
in respect of the following :-
1. Domestic or private expenses and any sums not expended
for the purpose of producing the profits.
2. Any loss or withdrawal of capital, the cost of improvements
and any expenditure of a capital nature.
3. Any sum recoverable under insurance or contract of indemnity.
4. Rent of or expenses relating to premises not occupied or
used for the purpose of producing the profits.
5. Taxes payable under the Inland Revenue Ordinance, except
Salaries Tax paid in respect of employees' remuneration.
6. Any remuneration or interest on capital or loans payable
to the proprietor or his/her spouse or, in case of a partnership,
to its partners or their spouses.
A transfer of certain allowable head office administrative
expenses by means of a charge to a local branch or subsidiary
in HK would be allowed as a deduction for HK tax purposes,
to the extent to which they were incurred during the basis
period for the year of assessment in the production of profits
chargeable to tax.
Losses
Losses made in an accounting year are to be carried forward
and set off against future profits of that trade but a corporation
carrying on more than one trade may have losses in one trade
offset against profits of the other. An individual who
incurs a trading loss and who claims Personal Assessment will
have the loss allowed as a deduction from his total income.
There is no time limit for any losses to carry forward.
However, if a person withdraws from an unincorporated business
consisting of not more than 20 partners while the loss is
still unutilized, his/her share of losses ceases to be available
against subsequent profits.
Depreciation Allowances
Commercial Rebuilding allowance
The rate of Commercial Rebuilding Allowance on qualifying
expenditure is at the rate of 4% per annum.
Plant and Machinery
Initial Allowance: 60% of qualifying expenditure in basis
period.
Annual Allowance: 10%, 20% or 30% on written down value brought
forward depending on the category to which the asset belongs.
However, expenditure in plant and machinery specifically
related to manufacturing, and computer hardware and software,
which are used by the end users can be 100% written off. The
residual value of such item already in hand can also be written
off immediately.
Industrial Building Allowances
Initial Allowance: 20% of qualifying expenditure
Annual Allowance: 4% of qualifying expenditure
Refurbishment Allowance for Hotels
A specific allowance to enable hotels to deduct refurbishment
expenditure over a five year period using an annual 20% write-off.
Books and Records
All persons carrying on business in Hong Kong are required to keep
sufficient records of their income and expenditure to enable
their assessable profits to be readily ascertained.
There are statutory requirements to record certain specified
details of every business transaction. Business records
must be retained for at least 7 years after the date of the
transaction to which they relate.
See also:
Guideline Note on the Hong Kong Territorial Source Principle of Taxation
Hong Kong Offshore Income
Sample Hong Kong Profits Tax Return
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