Viewpoints

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.

Section 51C of Inland Revenue Ordinance requires every business to keep sufficient business records. Section 2 of Inland Revenue Ordinance: a corporation is any company incorporated or registered under any enactment or charter in Hong Kong or elsewhere. For tax purpose, the terms “limited company” and “corporation” have the same meaning. The question of whether the corporation is a resident, or a non-resident of Hong Kong does not normally affect its profits tax liability — although there are special provisions applicable to non-residents concerning collection of tax. A corporation carrying on a business in Hong Kong has to file a tax return BIR 51 for every year of assessment. The tax return must be supported by the following: a certified copy of audited Balance Sheet and Profit and Loss Account and Director Report; a certified copy of Auditor Report; a tax computation showing how the Assessable Profits are computed from […]

The beginning figure is: Net Profit / Loss per accounts. Then, to this figure, add:  depreciation, remuneration to business owners (for unincorporated business), domestic or private expenses (for unincorporated business), non-deductible contribution to retirement scheme (for unincorporated business), expenses or losses of a capital nature, less:  gain on disposal of fixed assets, dividends income, non-assessable profits (e.g. those do not have a Hong Kong source), cost of computer hardware and software, cost of patents … etc., cost of manufacturing plant or machinery, depreciation allowance of plant and machinery, Industrial Building Allowance, Commercial Building Allowance, tax loss brought forward, and the balance (if positive) is Assessable Profit. Tax payable = Assessable Profit * Tax rate (Tax rate for corporation: 17.5%; for sole-proprietor and partnership business: 16%) If the balance is negative, it is called tax loss which is to be carried forward to set-off the next year’s assessable profits.

Section 14 of Inland Revenue Ordinance exempts profits arising from the sale of capital assets. Even without this exemption, it is a generally accepted accounting practice that capital income should not be included in trading profits. There are a few court cases on the captioned question: drawing distinction between income from “fixed capital” and income from “circulating capital” — referring the former to “capital receipts” and the latter to “revenue receipts”. It has been established from case law that “fixed capital” is what the owner turns to profit by keeping it in his own possession; whereas “circulating capital” is what he makes a profit of by parting with it and letting it change masters. It follows that land and buildings, plant and machinery, long-term leases and goodwill are fixed capital retained and used in the business — they form part of the permanent structure of the business — any receipt […]

Basis Period for assessment Normally, for a business that has been running on for years, the basis period is either: 1. the period of the year of assessment if the annual accounts ends on 31 March; 2. the accounting year that ends in the year of assessment if the accounts ends on a day other than 31 March; or 3. the lunar year that falls in the year of assessment if the annual accounts so adopts. Commencement of business The day of business commencement declared by the business owner upon registration of business is usually adopted without queries. However, in some cases involving disputes, it is not easy to determine the exact day of business commencement. Indeed, this is largely a question of facts. In general, a retailer starts to trade when goods are first offered for sale. A manufacturer starts trading when the manufacturing begins. A property developer starts […]

The taxpayer can apply for the hold-over on the following grounds: The actual profits are likely less than 90% of the provisional assessable profits assessed. On this ground, the taxpayer has to provide certified management accounts covering at least 8 months of the basis period. Loss brought forward is omitted or incorrect. The taxpayer has ceased trading. The taxpayer (who is a sole-proprietor or a partner) elects for Personal Assessment. The person has objected to the prior-year assessment. Notice of hold-over should be given to IRD at least 28 days before the due date or 14 days after the date of the demand for payment, whichever is the later.

Introduction The registration of a private company is a straight and fast process. The laws in Hong Kong does not require the engagement of professional agent to handle the registration itself. In other words, the founder (the investor or shareholder) can prepare the registration documents and handle the registration process by himself. Normally, the costs incurred for the registration of a private company will be lower should the founder decide to handle it by himself. In this case, the founder is only required to pay the official registration filing fee, business registration fee and costs for making the company chop. If professional agent is appointed, professional service fees will need to be incurred in addition to the official filing fees. Registration Costs (Founder Handles the Registration) As mentioned above, the founder of a company can chooses to handle the registration of a company in Hong Kong by himself. Assuming that […]