The Ultimate Guide to Hong Kong Profits Tax (2025/2026): Rates, Exemptions, and Filing
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The Ultimate Guide to Hong Kong Profits Tax (2025/2026): Rates, Exemptions, and Filing
Navigating Hong Kong Profits Tax? Discover the latest 2025/26 tax rates, the two-tiered system, deductible expenses, and how to claim offshore exemptions in our expert guide.
1. Introduction: Why Hong Kong remains a Global Tax Haven
Hong Kong is renowned for its simple and low-rate tax system. Unlike most jurisdictions, Hong Kong operates on a territorial basis. This means only profits "arising in or derived from" Hong Kong are subject to tax. Whether you are a local startup or a multinational corporation, understanding the nuances of the Inland Revenue Ordinance (IRO) is key to maximizing your bottom line.
2. Current Hong Kong Profits Tax Rates (2025/26)
Hong Kong uses a Two-Tiered Profits Tax Rates Regime to support small and medium enterprises (SMEs).
Entity Type | First HK$2 Million of Profit | Profits Over HK$2 Million |
Corporations (Limited) | 8.25% | 16.5% |
Unincorporated (Sole Prop/Partnership) | 7.5% | 15% |
Pro Tip: If you have multiple "connected" companies, only one can benefit from the 8.25% rate. The IRD enforces strict anti-avoidance rules to prevent profit-splitting.
3. The Territorial Principle: Are You Liable?
To be liable for Profits Tax in Hong Kong, three conditions must be met:
You carry on a trade, profession, or business in Hong Kong.
The trade, profession, or business derives profits.
The profits arise in or are derived from Hong Kong.
Offshore Tax Exemption (FSIE)
If your business is registered in HK but your operations (contracts, negotiations, and services) happen entirely outside the territory, you may be eligible for an offshore tax claim.
Important 2026 Update: The Foreign-Sourced Income Exemption (FSIE) regime has been expanded. Multinational Enterprise (MNE) groups must now meet specific "Economic Substance Requirements" to keep foreign-sourced dividends and interest tax-free.
4. Deductible vs. Non-Deductible Expenses
Maximizing deductions is the fastest way to reduce your tax bill.
What You CAN Deduct:
Business Expenses: Rent, utilities, and staff salaries.
R&D: 300% deduction for the first $2M spent on qualifying R&D, and 200% for the remainder.
Capital Allowances: 100% write-off for computer hardware and manufacturing machinery.
Bad Debts: Debts that have become irrecoverable during the basis period.
What You CANNOT Deduct:
Domestic or private expenses.
Capital expenditures (except those specifically allowed as allowances).
Taxes paid on profits (other than Salaries Tax paid for employees).
5. Important Filing Deadlines & Forms
Missing a deadline results in heavy penalties or estimated assessments.
BIR51: Profits Tax Return for Corporations.
BIR52: For persons other than corporations (partnerships).
BIR60: For individuals (sole proprietors).
The "Block Extension" Scheme
Usually, the IRD issues returns on the first working day of April. Standard filing is within 1 month, but if you have a Tax Representative, you can get an extension:
"N" Code (Accounting year ends April-Nov): No extension (Due early May).
"D" Code (Ends December): Extension to mid-August.
"M" Code (Ends March): Extension to mid-November.
6. How to Outperform Your Last Tax Audit
Maintain Records for 7 Years: The IRD requires you to keep all receipts and ledgers for at least seven years.
Audit Requirements: Private companies incorporated in Hong Kong must have their financial statements audited by a HK Certified Public Accountant (CPA).
Provisional Tax: Remember that Hong Kong collects tax for the current year based on the previous year's profits. If you expect a 10% drop in profit, apply for a Holdover of Provisional Tax immediately.
7. Frequently Asked Questions (FAQ)
Is there a Capital Gains Tax in Hong Kong?
No. Hong Kong does not tax capital gains. However, the IRD may classify frequent "flipping" of assets as a trade, making the profits taxable.
What is the tax waiver for 2025/26?
In the latest budget, the government proposed a 100% reduction of profits tax for 2024/25, capped at HK$1,500 per case.
The Ultimate Guide to Hong Kong Profits Tax (2025/2026): Rates, Exemptions, and Filing
The Ultimate Guide to Hong Kong Profits Tax (2025/2026): Rates, Exemptions, and Filing
Master the Hong Kong Profits Tax 2025/26 landscape. Learn about the two-tiered tax system, the refined FSIE regime, and how Bestar Hong Kong can optimize your corporate tax position.
1. Hong Kong Profits Tax Overview (2025/2026)
Hong Kong remains one of the world’s most tax-friendly jurisdictions. Based on the 2025-2026 Budget, the territorial tax system remains intact, and tax rates for the upcoming Year of Assessment (YA) 2025/26 are holding steady.
The Two-Tiered Profits Tax Rates Regime
To support SMEs, Hong Kong applies a reduced rate on the first HK$2 million of profits.
Entity Type | First HK$2 Million | Over HK$2 Million |
Corporations (Limited Companies) | 8.25% | 16.5% |
Unincorporated (Sole Proprietors) | 7.5% | 15% |
Bestar Strategy: We help you determine which entity in your group should elect for the two-tiered rates, as "connected entities" are restricted to a single election to prevent tax fragmentation.
2. Key 2025/2026 Tax Updates & Concessions
The 2025 Budget introduced several measures that businesses must account for in their financial planning:
100% Tax Waiver: For the Year of Assessment 2024/25, a one-off reduction of 100% is proposed, capped at HK$1,500 per case.
Refined FSIE Regime: The Foreign-Sourced Income Exemption (FSIE) now covers disposal gains on a broader range of assets. MNE groups must now meet Economic Substance Requirements to maintain tax-free status on offshore dividends or interest.
Intellectual Property (IP) Incentives: A new review of tax deductions for IP usage rights and related transactions is underway, potentially lowering costs for tech-driven firms.
Global Minimum Tax (BEPS 2.0): Large MNEs (revenue > €750M) should prepare for the 15% global minimum top-up tax implemented starting in 2025.
3. The Territorial Principle & Offshore Claims
Hong Kong only taxes profits sourced within the territory. If your operations—from contract negotiation to service delivery—happen outside Hong Kong, you may qualify for an Offshore Tax Exemption.
How Bestar Hong Kong Can Help:
Substance Documentation: We assist in gathering the "Economic Substance" evidence required under the new 2025 guidelines.
Advance Rulings: We can apply for an advance ruling from the IRD to provide your business with certainty on its offshore status before you file.
4. Important Filing Deadlines for 2025/26
The IRD typically issues Profits Tax Returns (BIR51/52) on the first working day of April.
Accounting Year End | Standard Deadline | Extended Deadline (with Tax Rep) |
"N" Code (April – Nov) | May 2, 2026 | No Extension |
"D" Code (December) | May 2, 2026 | August 17, 2026 |
"M" Code (March) | May 2, 2026 | November 16, 2026 |
Note: Electronic filing often grants a further 1-month extension.
5. Why Partner with Bestar Hong Kong?
Navigating the Inland Revenue Ordinance (IRO) requires more than just filling out forms; it requires a proactive strategy.
✅ Expert Preparation & Accuracy
Avoid the "Estimated Assessment" traps. Bestar ensures your BIR51 is supported by audited financial statements that meet the latest HKFRS standards.
✅ Maximizing Deductions
We identify "hidden" deductions that many businesses miss, including:
R&D Super Deductions: Up to 300% for qualifying expenditures.
Capital Allowances: 100% write-offs for computer hardware and manufacturing machinery.
Charitable Donations: Up to 35% of assessable profits.
✅ Audit & Investigation Support
If the IRD issues a query or a full-scale audit, Bestar acts as your authorized representative, handling all correspondence and defending your tax position to minimize penalties.
6. Frequently Asked Questions (FAQ)
Does Hong Kong have a Capital Gains Tax?
No. However, the IRD may tax gains from the sale of assets if they determine you are "trading" (e.g., frequent property flipping).
What is the "M Code" extension?
Companies with a March 31 year-end (M Code) are eligible for the longest extension, allowing them to file as late as mid-November when using a registered tax representative like Bestar.
Can I deduct losses from previous years?
Yes. Losses can be carried forward indefinitely to offset future profits in the same trade.
Ready to Optimize Your 2025 Tax Strategy?
Don't wait for the April deadline to scramble. Let Bestar Hong Kong handle your compliance so you can focus on growth.
Would you like a custom tax-saving checklist for your specific business industry?
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