Provisional Profits Tax
As the profits tax is based on the assessable profits of each fiscal period, which usually consists of 12 months, there are sometimes estimated assessments on taxes based on the last year's profits.
The provisional profits tax can be paid in two separate installments. The first installment is approximate and covers 75%, while the remaining 25% should be paid after three months.
After the assessable profits of the year have been determined, the company can receive a tax credit for the amount paid. Any excess amount paid can be credited to the company for the next fiscal period.
For any clarification with the authorities, companies that qualify for the provisional profits tax can apply for the clarification during a valid period. Typically, this period is one month before the due date or two weeks after the payment notice.
Flat-Rate Corporate Tax System
Another element that Hong Kong's tax system follows is the principle of a flat-rate tax, which means that the tax rate is not progressive or increases in respect of the profit amount. The Inland Revenue Department offers two profit tax rates for companies, the single-tier and the two-tier.
Single-Tier
- This option gives a rate of 16.5% based on assessable profits for companies.
- However, for unincorporated companies, the rate is 15%.
Double-Tier
- For incorporated and unincorporated companies, the second option lowers the tax rate for assessable profits within the first $2 million Hong Kong Dollars.
- This rate can be helpful for small and medium-sized enterprises, as it reduces the amount of taxes to pay, starting the year of assessment 2018/2019. To consult the tax rates in Hong Kong, please see the following link from the tax authority.
- Companies with profits under the first $2 million cap get a concessionary tax rate of 8.25%. Any remaining profits above $2 million will be taxed at 16.5%.
- Unincorporated businesses with profits under the first $2 million are taxed at 7.5%, while all other profits above the first $2 million will be taxed at 15%.
Tax Incentives in Hong Kong
To make Hong Kong company incorporations more attractive, the local authorities have created incentives; here we will enlist them:
- Hong Kong offers a 100% write-off for expenses from purchasing machinery, mainly related to manufacturing and computer hardware and software.
- A period of five years to write off expenses for renovating or refurbishing a business's grounds or building.
- Expenses from purchasing machinery made for environmental protection and environmentally-friendly vehicles receive a 100% deduction.
- In addition, there is a 100% deduction on profits tax offered for environmental protection installation costs as long as the expense is incurred on or after 1 April 2018.
- Tax concessions are offered for mutual funds and trusts.
- There are profit tax deductions for expenses earned by companies that sell intellectual property, mainly patents, copyrights, rights in performances, etc.
- Hong Kong-operated funds are eligible for tax exemption on asset transactions subject to specific conditions, regardless of structure, size, purpose, or management location.
- Profit tax exemptions are also offered on investments in local and overseas private companies.
Filing the Profits Tax Return
Following the line of a simple tax regime, the Hong Kong Inland Revenue Department issues the Profit Tax Returns for companies every year during April without delay.
However, according to the chosen fiscal year-end of the company, the due date to submit the declaration can change from April to November of the following year.
Although extensions can be requested from the tax authority, it is important to prepare beforehand and submit all the supporting documents and forms in due time.
Failing to submit the forms in time can generate penalties, fees, and additional assessment from the Inland Revenue Department.
For newly registered businesses, there is a grace period of 18 months after the date of incorporation, in which the Hong Kong Inland Revenue Department issues the first profit tax return.
Conclusion
While one of the many attractive features of Hong Kong is its simple tax system, some options allow companies to maximize their profits.
However, it should not be forgotten that compliance is king. The preparation of submitting everything before the deadlines can save your business time and, more importantly, money by avoiding unnecessary penalties.
If you need a company to support you with tax planning, you can visit our Company Incorporation page and find the right service provider for your company.