Taxes on Corporate Income

Taxes on Corporate Income | Bestar

Hong Kong Corporate Taxes

Taxes on Corporate Income

The corporate income tax in Hong Kong, also known as profits tax, is a flat rate levied on assessable profits arising in or derived from Hong Kong. Here's a breakdown of the key aspects:   

Tax Rate

Hong Kong has a two-tiered profits tax system:   

• First HK$2 million of assessable profits: 8.25% for corporations   

• Remaining profits: 16.5% for corporations

Territorial Principle

Hong Kong adopts a territorial principle of taxation. This means that only profits sourced in Hong Kong are subject to profits tax. Profits derived from sources outside of Hong Kong are generally not taxed, even if they are remitted to Hong Kong.   

Foreign-Sourced Income Exemption (FSIE) Regime

Hong Kong has a Foreign-Sourced Income Exemption (FSIE) regime, which exempts certain types of foreign-sourced income from profits tax, including:

• Dividends

• Interest

• Gains from the disposal of equity interests   

• Intellectual property (IP) income

To qualify for these exemptions, entities must meet economic substance requirements.   

Tax Filing

The Inland Revenue Department (IRD) of Hong Kong issues profits tax returns on the first working day of April every year. The standard filing deadline is one month from the date the tax returns are issued.   

Deductions and Allowances

A wide range of expenses incurred in generating taxable profits are deductible, including:

• Costs of goods sold

• Rent

• Salaries

• Depreciation

Capital allowances are also available for certain assets, such as industrial buildings and machinery.

Tax Incentives

Hong Kong offers various tax incentives to specific industries, such as:

• Air services

• Financial services

• Shipping

Double Taxation Agreements (DTAs)

Hong Kong has entered into Double Taxation Agreements (DTAs) with many countries to avoid double taxation of income.   

Recent Updates

• Expansion of FSIE Regime: Effective from 1 January 2024, the scope of the FSIE regime has been expanded to include gains from the disposal of other types of assets, such as movable and immovable property.   

• Patent Box Regime: Effective from the year of assessment 2023/24, qualifying income from certain IP is eligible for a concessionary tax rate of 5% under the patent box regime.   

Important Notes:

• The information provided here is a general overview. Specific circumstances may vary.

More Detailed Information

The world of Hong Kong's corporate income tax (Profits Tax) can be quite intricate. Here's a deeper dive into some key areas, along with some practical examples:

1. Determining the Source of Profits: A Crucial Factor

Hong Kong's territorial tax system hinges on the source of profits. This can be complex to determine, especially for businesses with cross-border operations. The Inland Revenue Department (IRD) examines various factors, including:

• Where the activities generating the profits take place: Where are the goods manufactured? Where are services provided? Where are contracts negotiated and concluded?

• Location of the business operations: Where is the principal place of business? Where are key decisions made?

• Where the profits are realized: Where are sales invoices issued? Where are payments received?

Example:

• Company A manufactures goods in mainland China and sells them to customers in Hong Kong. The profits from the sales are likely sourced in Hong Kong, as the sales contracts are concluded and payments are received there.

• Company B provides consulting services to clients in Singapore. Even if Company B is based in Hong Kong, the profits are likely sourced in Singapore, as the services are performed there.

2. Foreign-Sourced Income Exemption (FSIE) Regime: A Closer Look

The FSIE regime aims to prevent double taxation on certain types of foreign income. However, it's crucial to understand the "economic substance requirements" that apply to these exemptions. These requirements generally mean that the entity must have substantial economic activity in Hong Kong in relation to the foreign income.

Example:

• Company C receives dividends from its subsidiary in Australia. To claim exemption under the FSIE regime, Company C must demonstrate that it has adequate economic substance in Hong Kong, such as employing qualified personnel and incurring operating expenses in Hong Kong in relation to the management of the Australian subsidiary.

3. Deductions and Allowances: Maximizing Tax Efficiency

Businesses can reduce their taxable profits by claiming eligible deductions and allowances. Some key points to remember:

• Deductible expenses: Expenses must be "wholly and exclusively" incurred in the production of assessable profits. This means that personal expenses or expenses not related to the business are not deductible.

• Capital allowances: These allowances are available for capital expenditures on assets like machinery and equipment. The rates of allowances vary depending on the type of asset.

• Depreciation: Depreciation can be claimed on certain assets, such as buildings and leasehold improvements.

Example:

• Company D can deduct salaries paid to its employees who are directly involved in generating sales revenue. However, salaries paid to employees who are not involved in the business operations are not deductible.

4. Tax Incentives: Targeting Specific Industries

Hong Kong offers various tax incentives to promote the development of specific industries. These incentives may include:

• Concessionary tax rates: Reduced tax rates for certain types of income, such as those derived from aircraft leasing or shipping activities.

• Tax holidays: Exemptions from profits tax for a specified period.

• Deductions for specific expenditures: Enhanced deductions for research and development (R&D) expenditures.

Example:

• Company E, which is engaged in aircraft leasing activities in Hong Kong, may be eligible for a concessionary tax rate of 8.25% on its qualifying profits.

5. Double Taxation Agreements (DTAs): Avoiding Double Taxation

Hong Kong has DTAs with many countries to prevent double taxation of income. These agreements typically provide for:

• Reduced withholding tax rates: Lower rates of tax on dividends, interest, and royalties paid to residents of the other country.

• Exemption from tax: Exemption from tax on certain types of income, such as business profits, in one of the countries.

Example:

• Company F, which is a resident of Hong Kong, receives dividends from its subsidiary in the United Kingdom. Under the DTA between Hong Kong and the United Kingdom, the withholding tax rate on the dividends may be reduced.

Important Reminders:

• Tax laws and regulations are subject to change. It's crucial to stay updated on the latest developments.

How Bestar can Help

Bestar can be invaluable assets for both individuals and businesses. We possess in-depth knowledge of tax laws and regulations, and can provide a wide range of services to help you navigate the complex world of taxes. Here's how we can help:   

For Individuals:

• Tax Planning: Bestar can help you develop strategies to minimize your tax liability while staying compliant with the law. This may involve identifying eligible deductions and credits, optimizing investment strategies, and planning for major life events like marriage, divorce, or retirement.   

• Tax Preparation: Bestar can prepare and file your tax returns accurately and efficiently, ensuring that you meet all deadlines and avoid penalties. They can also represent you in case of a tax audit or inquiry from the tax authorities.   

• Tax Advice: Bestar can provide guidance on specific tax issues, such as the tax implications of buying or selling a property, investing in stocks, or starting a business. They can also help you understand complex tax laws and regulations.   

For Businesses:

• Corporate Tax Planning: Bestar can help businesses develop tax-efficient strategies for their operations, including choosing the right business structure, managing transfer pricing, and optimizing international tax planning.   

• Tax Compliance: Bestar can ensure that businesses comply with all tax laws and regulations, including filing tax returns, paying taxes on time, and maintaining proper records. We can also represent businesses in tax audits or disputes with the tax authorities.   

• Tax Advisory: Bestar can provide guidance on a wide range of tax issues that businesses face, such as mergers and acquisitions, restructuring, and international expansion. We can also help businesses understand the tax implications of new laws and regulations.   

General Benefits of Hiring Bestar:

• Save time and reduce stress: Tax laws can be complex and time-consuming to understand. Bestar can take the burden of tax planning and preparation off your shoulders, allowing you to focus on other important matters.   

• Minimize tax liability: Bestar can help you identify all eligible deductions and credits, ensuring that you pay the least amount of tax possible.

• Avoid penalties and audits: Bestar can help you stay compliant with tax laws and regulations, reducing the risk of penalties and audits.   

• Stay updated on tax laws: Tax laws are constantly changing. Bestar stays up-to-date on the latest developments and can advise you on how they may affect you.   

• Expert representation: If you are facing a tax audit or dispute, Bestar can represent you and protect your interests.   

Choosing Bestar:

Choose Bestar, considering the following factors:

• Qualifications and experience: Bestar has relevant certifications, such as Certified Public Accountants (CPAs), or Enrolled Agents (EAs).

• Area of expertise: Bestar has experience in the specific tax issues you are facing, such as individual income tax, corporate tax, or international tax.

• Reputation and references: References from other clients and online reviews to get an idea of Bestar's reputation.

• Fees: Discuss the fees upfront and make sure you understand how they are calculated.

By hiring Bestar, you can gain peace of mind knowing that your taxes are being handled correctly and efficiently. We can help you navigate the complex world of taxes and ensure that you are taking advantage of all available opportunities to minimize your tax liability.

Request for Quote