Viewpoints from Kaizen

What are assessable profits? This question hinges on two points: first, there are profits, and second, such profits are assessable. The Inland Revenue Ordinance does not define “profits”. In fact, there are a number tax cases, particularly in the U.K., on this question. In business practice, profit means the net profit, or the net gain, or the surplus of incomes over expenses. It follows that profits concern determining incomes and expenses. The second point is: what profits are assessable? As established from tax cases, assessable profits are the accounting profits determined in accordance with generally accepted accounting principles (GAAP) as adjusted to conform with the provisions of Inland Revenue Ordinance. Then, what are accounting profits or GAAPs? This is a big topic and there are a lot of accounting textbooks on the question. Besides, the Hong Kong Society of Accountancy has from time to time issued Statements of Standard Accounting […]

There are no withholding taxes in Hong Kong as such, but there are certain circumstances in which a company making a payment to a foreign associate (subsidiary or holding company) which is deemed to be Hong Kong source income needs to need to withhold the tax. For instance, when a Hong Kong entity pays royalties for the use of intellectual property to its own offshore licensing affiliate, then tax is due of 10% of 16% = 1.6% and this must be withheld by the Hong Kong paying company.

Hong Kong Profits Tax is territorial in nature and only profits which have, or which are deemed to have, a Hong Kong source are subject to Profits Tax. If a Hong Kong company is established in such a manner that it does not carry on business in Hong Kong or if it generates profits which have a non-Hong Kong source the company can book income without incurring a Profits Tax liability. Three tests To be liable to Hong Kong Profits Tax a company must meet three basic tests as set out by the Privy Council in the Hang Seng Bank case. These tests are: The company must be carrying on a trade, profession or business in Hong Kong; The company must be generating profits from that trade, profession or business of a type which are subject to Profits Tax, for example, trading profits or commission as opposed to non-taxable capital […]

Section 51C of the Inland Revenue Ordinance: Every person carrying on a trade, profession or business in Hong Kong must keep sufficient business records, either in English or Chinese, for his income and expenditure so as to enable his assessable profits to be ascertained. He must keep such records for at least 7 years. Failure to do so may render him liable to a penalty of HK$100,000. In this respect, business record includes: 1. books recording receipts and payments, income and expenditure; 2. original documents such as vouchers, bank statements, invoices, bills, receipts, etc.; 3. books recording assets and liabilities; 4. books recording daily cash receipts and cash expenditures; 5. where the business involves dealing in goods –  a record of all goods purchased, and all goods sold showing date of transactions, the goods concerned, the suppliers, the customers;  a record of trading stock at the opening and […]

Section 14 of Inland Revenue Ordinance levies profits tax on a person carrying on a trade, a business or a profession in Hong Kong in respect of his profits derived from Hong Kong. Section 2 defines “person” to include a partnership. Section 22 empowers the Revenue to issue a profits tax assessment on a partnership. Normally, the precedent partner is responsible to file a Profits Tax Return (BIR 52) for every year of assessment. According to Section 2, “precedent partner” is the one first named in the partnership agreement. If there is no such agreement, he will be the first named in the usual partnership name or in any statutory document such as Business Registration Certificate. If the precedent partner fails to file the tax return or to do any acts required by the Ordinance (including payment of tax), every partner will be jointly and severally liable to do it […]

Section 14 of Inland Revenue Ordinance lays down the basic charge: Every person carrying on a trade, profession or business in Hong Kong — who has profits arising in or derived from Hong Kong — is chargeable to Profits tax. This applies to both Hong Kong residents and non-residents. Profits tax may be levied on the non-resident directly (assessed in his own name) or indirectly (assessed on his agent). The tax can be recoverable from the non-resident or the agent in Hong Kong. According to Section 2 of Inland Revenue Ordinance, “agent” includes (a) the agent, attorney, factor, receiver or manager in Hong Kong, and (b) any person in Hong Kong through whom the non-resident is in receipt of any profits arising in or derived from Hong Kong. The agent should withhold an adequate amount out of the non-resident’s assets within his control for payment of tax. Failure to do […]

Profits tax is levied under the Inland Revenue Ordinance on the “assessable profits” of corporate entities, partnerships, trusts and sole proprietorships. It is levied according to the “territorial principle” meaning that it is the source of the income rather than the residential or non-residential status of the entity that determines whether trading income is or is not subject to Hong Kong profits tax. The territorial principle means that only income which meets the following 3 preconditions is subject to Hong Kong profits tax: The entity must trade in Hong Kong The income must arise from such a trade The income must arise in or be derived from Hong Kong The residential or non-residential status of the entity is irrelevant as is the fact that the income is or is not exempt from tax in a foreign jurisdiction. Advance tax rulings are available in the SAR and are particularly favored and recommended on […]

The tax year starts on 1st April. The assessment to profits tax is provisional and is based on the previous year’s assessable profits with 75% of the assessment being due by the 3rd quarter and the final 25% being due at the year-end. Tax payments delayed less than 6 months are subject to a 5% non-deductible surcharge whereas payments overdue by more than 6 months are subject to a 10% non-deductible surcharge. A tax credit is granted where the previous year’s assessment exceeds the currents year’s assessable profits.

The following are exempt from the assessable profits: 1. dividends received from a corporation 2. profits already assessed to Profits Tax in name of other persons such as partnership 3. interest on:  tax reserve certificates  bonds issued under the Loans Ordinance or the Loans (Government Bonds) Ordinance  Exchange Fund debt instruments  Hong Kong dollar-denominated multilateral agency debt instruments  a deposit with a bank (this exemption does not apply to the bank itself). 4. Sums accrued to an authorized mutual fund corporation or an authorized unit trust by way of:  Interest  gains or profits arising from the sale or other disposal or on the redemption on maturity or presentment of securities  gains or profits under foreign exchange contracts or futures contracts. Where a taxpayer makes profits on qualifying debt instruments, such instruments are only taxed at half the relevant profits tax rate. To […]

Normally a person chargeable to profits tax is an individual, a partnership or a corporation. If a “person” carrying on a business or a trade in Hong Kong does not belong to the aforesaid categories, he is probably a body of persons — maybe a club, a trade union or a trade association. These “persons” may still be chargeable, but subject to special provisions of the Inland Revenue Ordinance. Besides, a charity is exempt from tax if it does not carry on a trade or business. As established from case law, a charity is one doing the following: (a) relief of poverty, (b) advancement of religion, (c) furtherance of education or (d) any activities concerning public benefit. Political organizations, however, do not normally meet these criteria. If an organization claims to be a charity, it should apply to the Revenue for tax exemption under Section 88 of Inland Revenue Ordinance.