HK PROFITS TAX
Scope of the Charge
Persons, including
corporations, partnerships, trustees and bodies of persons carrying on any trade,
profession or business in HK 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. The question of whether a business is carried on in HK and
whether profits are derived from HK is largely one of fact.
Profits of unincorporated businesses are currently chargeable at 15% and
corporation at 16.5%.
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 & Records
All persons carrying on business in HK 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.
Offshore Income
You may also be interested to view the Conditions for Claiming Offshore Income
