SCOPE OF 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 7.5% for the first 2 million HK$ assessable profits and 15% for the rest, and corporation at 8.25% for the first 2 million HK$ assessable profits and 16.5% for the rest.
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 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 :
- Interest on funds borrowed (provided certain conditions are satisfied) and rent of buildings or land occupied for the purposeof producing the profits.
- Bad and doubtful debts (any recoveries to be treated as income when received).
- Repairs of articles, premises, plant and machinery used in producing the profits.
- 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.
- Expenditure on scientific research including market, management and business research and payments for technical education subject to certain rules.
- 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 :
- Domestic or private expenses and any sums not expended for the purpose of producing the profits.
- Any loss or withdrawal of capital, the cost of improvements and any expenditure of a capital nature.
- Any sum recoverable under insurance or contract of indemnity.
- Rent of or expenses relating to premises not occupied or used for the purpose of producing the profits.
- Taxes payable under the Inland Revenue Ordinance, except Salaries Tax paid in respect of employees' remuneration.
- 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 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.
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.
You may also be interested to view the Conditions for Claiming Offshore Income