Corporate Income Tax in Hong Kong in detail from A to Z

Hong Kong is renowned worldwide for its low and simple corporate income tax system, which has contributed to making Hong Kong one of the most business-friendly jurisdictions. 

Hong Kong’s corporate income tax system follows the principles of flat taxation and territorial taxation. In addition, tax incentives are another reason for Hong Kong’s competitiveness and make it an attractive investment destination in the Asia-Pacific region.

This GLA article is intended to provide an overview of the corporate income tax system, tax rates, and tax incentives available to companies in Hong Kong.

1. What is corporate income tax in Hong Kong?

Corporate income tax in Hong Kong, also known as profits tax, follows the territorial and flat rate principles. 

Hong Kong follows a territorial tax system. In other words, it means that tax will only be levied on profits arising from, or originating from, transactions or businesses in Hong Kong. Profits tax will not be applied to profits originating outside Hong Kong. Therefore, if a company/individual Established company in Hong Kong but the profit is derived from outside Hong Kong, the company/individual will not be liable to pay tax on that profit, regardless of whether the profit has been remitted to Hong Kong or not. 

The territorial taxation principle in Hong Kong does not distinguish between residents and non-residents. For example, if an individual is a permanent resident of Hong Kong but the profits are derived elsewhere, he or she will not be taxed on that portion of the profit. Similarly, if an individual is not a resident of Hong Kong but derives profits from Hong Kong, he or she will be taxed on the profits in Hong Kong.

2. Corporate income tax rate in Hong Kong

In Hong Kong, companies/corporations have two options regarding corporate income tax rates:

• Single-tier tax rate: Hong Kong incorporated companies will be taxed at 16,5% on their taxable profits and unincorporated businesses will be taxed at 15%. 

There are two types of unincorporated businesses in Hong Kong: 

• 2-tier tax rate: 
  • For companies/corporations: 8,25% on taxable profits up to USD 2,000,000, 16,5% on taxable income above USD 2,000,000.
  • For unincorporated business: 7,5% on taxable profits up to USD 2,000,000; 15% on taxable profits over USD 2,000,000. 

Companies/corporations using GLA's exclusive corporate income tax comparison tool to assess the overall corporate income tax rate in Hong Kong compared to other countries in the world. 

3. Deadline and requirements for corporate income tax declaration in Hong Kong?

The Inland Revenue Department of Hong Kong (IRD) usually issues corporate profits tax returns on April 01st (April 04st). Normally, businesses should fill in the information in this tax return within 1 month from the date of issuance. In the case of newly established companies, the Hong Kong Inland Revenue Department (IRD) will issue the corporate income tax return 18 months after the date of incorporation or the date of commencement of business.

6. Conditions for exemption from corporate income tax audit in Hong Kong

The following are the conditions for exemption from filing audited accounts and profit tax returns:

• Dormant companies (as defined by the Companies Ordinance as companies that have no relevant accounting transactions during the financial year) will be exempted from audit preparation only if they have registered with the Government's Company Registry as officially dormant by filing a special resolution.
• Companies incorporated in countries where the law does not require accounts to be audited.
• Branches of foreign companies in Hong Kong provided the following information is provided with the tax return:
  • Place of establishment of foreign company.
  • The law of that country requires statutory audit of all company accounts worldwide.
  • Has the audit been conducted?
  • A brief summary of the financial and accounting records of the Hong Kong branches.
  • Certified copies of financial and accounting reports. 
• For small companies (defined as companies whose total income does not exceed HK$2,000,000 for the base financial year), audit is required but not required for filing with the tax authorities.

8. Preferential taxes applicable to Hong Kong companies

The following preferential tax rates apply to Hong Kong companies:

• Immediately eliminate taxes paid on expenses related to investments in upgrading manufacturing plants, machinery, computer hardware and software.
• Cancellation of taxes paid over 5 years for expenses incurred in upgrading business premises.
• Interest earned on qualifying debt instruments will receive tax incentives.
• Reinsurance companies enjoy preferential tax rates for their overseas business operations.
• Interest earned on any deposits with an authorised institution in Hong Kong will be tax-free. Please note: This offer will not apply to interest received/earned from financial institutions.
• Offshore funds (non-resident individuals, partnerships, trustees of trust assets, companies) conducted by authorized financial companies and institutions licensed or registered under the Securities and Futures Ordinance will be exempt from tax on profits derived from transactions in securities, futures, foreign exchange contracts, etc. in Hong Kong. Please Note: Non-resident entities in Hong Kong are not allowed to carry on other business in Hong Kong.
• 100% deduction for expenses incurred on investment, upgrading of factory and machinery. 20% deduction for capital expenditure each year for five consecutive years for installation, construction of parts of building structure.

8. Agreement for the avoidance of double taxation on Hong Kong corporate income

Double taxation arises when an income or profit is subject to tax in two different countries, one in which the income or profit is earned and the other in which the individual is resident where the income is received. Double taxation treaties or International Tax Treaties will eliminate such double taxation and encourage investment between countries.

As Hong Kong applies the territorial taxation principle, i.e. only income/profits sourced from or arising in Hong Kong are subject to tax, local companies will not be taxed twice on any profits sourced outside Hong Kong.

In addition, Hong Kong has established a network of more than 35 Tax Treaties to provide further tax exemptions and tax rate reductions.

9. Is it necessary to pay corporate income tax in case the company makes a loss?

A Hong Kong company that makes a loss will not need to pay corporate income tax because Hong Kong applies territorial tax rates. In Hong Kong, a company that does not make a profit will not need to pay corporate income tax. 

Losses or losses in an accounting year may be carried forward indefinitely and set off against future profits of the business. A group operating in several business lines may have losses in one line and cause a deduction against the profits of another line. Hong Kong does not allow group relief (i.e. carrying on losses between companies in the same group). Losses or losses cannot be carried back. Capital impairment charges are not considered deductible.

10. How does GLA support Hong Kong companies in declaring and paying corporate income tax?

GLA with experience supporting many companies and corporations will support Enterprises in declaring and paying corporate income tax as follows:

• Prepare corporate income tax returns for Hong Kong companies.
• Prepare financial statements and audit reports for Hong Kong company.
• Determine the corporate income tax payable for Hong Kong companies.

Highlights

• Hong Kong applies a corporate income tax rate of 16,5%.
• Hong Kong companies are required to file corporate income tax returns for the annual financial year (April 1 to March 4).
• Hong Kong companies pay corporate income tax only on income generated within Hong Kong territory regardless of the company's residency status.