In Hong Kong, profits tax is an important tax concept that every business and self-employed individual must understand. As the 2025/26 tax assessment year approaches, understanding the calculation method for profits tax and the deductible expenses becomes particularly crucial. This article will explore profits tax in depth, including its definition, calculation method, scope, tax rates, and the latest tax relief measures to help you better understand and apply this tax knowledge.
What is Profits Tax?
Profits tax is a tax levied by Hong Kong on profits generated from business operations within the territory. According to the Hong Kong Inland Revenue Ordinance, whether it is a limited company or an unincorporated business, profits tax must be paid if profits are earned in Hong Kong. This means that even if the business owner is not a Hong Kong resident, they are still subject to relevant tax regulations as long as the profits originate from Hong Kong. Additionally, profits tax is based on the “territorial source principle,” meaning only profits earned within Hong Kong are taxable, while profits derived from overseas are not subject to taxation.
Profits Tax Calculation Method and Tax Rates
Hong Kong’s profits tax adopts a two-tiered system with a clear calculation method and fixed steps. The basic principle is to tax based on the assessable profits earned in Hong Kong.
Calculation Steps
- Determine Total Income: First, calculate all income generated or derived from Hong Kong during the assessment year.
- Deduct Allowable Expenses: Subtract all business expenses incurred to earn those profits from the total income. These expenses must comply with the Inland Revenue Ordinance, with common deductible items including employee salaries and benefits, rent, maintenance costs, depreciation, and office expenses.
- Calculate Assessable Profits: Assessable profits are the net amount after deducting allowable expenses from total income.
- Formula: Assessable Profits = Total Income – Allowable Expenses
- Apply Applicable Tax Rate: Based on the nature of your business (corporation or unincorporated) and the amount of assessable profits, apply the following two-tiered tax rates:
|
Business Type
|
First HKD 2 Million of Profits
|
Profits Exceeding HKD 2 Million
|
|---|---|---|
|
Limited Company
|
8.25%
|
16.5%
|
|
Unlimited Company
|
7.5%
|
15%
|
Only one subsidiary within a group can apply the two-tiered tax rate, while other subsidiaries must pay tax at 15% or 16.5%.
Profits Tax Calculation Examples
Limited Company
Example 1
For an assessment year with profits of HKD 1,000,000, since the amount is below HKD 2 million, the applicable tax rate is 8.25%.
Calculation: HKD 1,000,000 × 8.25% = HKD 82,500.
Example 2
For an assessment year with profits of HKD 3,000,000, since the amount exceeds HKD 2 million, the tax is calculated as follows: the first HKD 2 million at 8.25%, and the remaining HKD 1 million at 16.5%.
Calculation: (HKD 2,000,000 × 8.25%) + (HKD 1,000,000 × 16.5%) = HKD 165,000 + HKD 165,000 = HKD 330,000.
Unlimited Company
Example 1
For an assessment year with profits of HKD 1,000,000, since the amount is below HKD 2 million, the applicable tax rate is 7.5%.
Calculation: HKD 1,000,000 × 7.5% = HKD 75,000.
Example 2
For an assessment year with profits of HKD 3,000,000, since the amount exceeds HKD 2 million, the tax is calculated as follows: the first HKD 2 million at 7.5%, and the remaining HKD 1 million at 15%.
Calculation: (HKD 2,000,000 × 7.5%) + (HKD 1,000,000 × 15%) = HKD 150,000 + HKD 150,000 = HKD 300,000.
2025/26 Tax Assessment Year Profits Tax Relief
Currently, the government has not yet announced details of profits tax relief measures for the 2025/26 tax assessment year. For reference, the 2024/25 tax assessment year implemented a one-time tax relief covering 100% of profits tax, salaries tax, and personal assessment, with a cap of HKD 1,500 per case.
Deductible Profits Tax Items
Companies operating in Hong Kong can deduct reasonable business expenses from their assessable income when calculating profits tax to reduce their tax liability. These deductible expenses must generally be directly or necessarily incurred to generate assessable profits.
Common Deductible Expenses
- Operational Expenses: Including rent, salaries, advertising costs, consumables, utilities, and telephone expenses directly related to business operations.
- Depreciation: Depreciation of fixed assets (e.g., machinery, office furniture).
- Bad Debts: Unrecoverable receivables.
- Donations: Donations to approved charitable organizations, subject to specific conditions.
- Interest Expenses: Interest on loans used for business operations.
- Research and Development (R&D) Expenses: Eligible for additional tax incentives.
Other Deductible Expenses
- Employee Benefits: Such as medical insurance and pension plans, subject to conditions.
- Travel Expenses: Business-related travel costs.
- Legal Fees: Legal expenses related to business operations.
- Insurance Premiums: Premiums for business-related insurance.
Tax Rebate Calculation Example and Process
Tax Rebate Calculation Example
Scenario:
Suppose a company in the 2024/25 assessment year has assessable profits of HKD 5 million and qualifies for all deductions, with significant research and development activities eligible for tax incentives.
Calculation Process:
- Calculate Base Tax Payable:
- First HKD 2 million: HKD 2,000,000 × 8.25% = HKD 165,000
- Remaining HKD 3 million: HKD 3,000,000 × 16.5% = HKD 495,000
- Total Base Tax Payable: HKD 165,000 + HKD 495,000 = HKD 660,000
- Calculate R&D Tax Incentive:
- Assume the company spent HKD 1 million on qualifying R&D activities, eligible for additional tax deductions. The specific deduction amount depends on IRD regulations.
- Final Tax Payable:
- Subtract the R&D tax incentive from the base tax payable to determine the final tax liability.
This is a simplified example, and actual calculations may be more complex depending on the company’s specific circumstances and tax regulations. It is recommended to seek professional tax services to ensure compliance with Hong Kong regulations and timely filing.
Tax Rebate Process
The profits tax rebate process in Hong Kong generally includes the following steps:
- File the Tax Return: Businesses must complete and submit the profits tax return along with relevant supporting documents to the IRD within the specified deadline, either online, by mail, or in person.
- IRD Review: The IRD reviews the submitted tax return to verify accuracy and calculate the tax payable or refundable.
- Tax Assessment Notice: The IRD issues a tax assessment notice detailing the tax payable or refundable amount.
- Refund Issuance: If eligible for a refund, the IRD issues the refund via cheque.
How to File a Profits Tax Return?
Filing a profits tax return is a legal obligation for businesses in Hong Kong. The process can be divided into two main steps: preparing documents and filing the tax return.
Preparing Required Documents
Before filing the tax return, you need to organize and prepare the following key documents, which will serve as the basis and evidence for the tax return:
- Financial Statements:
- Audited financial statements (for limited companies), including balance sheets, profit and loss statements, and audit reports.
- Profit and loss accounts and balance sheets (for unincorporated businesses).
- Accounting Records:
- All bank statements to verify transaction records.
- All sales and purchase invoices and receipts to prove income and expenses.
- Legal Documents:
- Copy of the company registration certificate or business registration certificate.
- Any relevant sales, service, or employment contracts.
- Copy of lease agreements.
- Other Tax-Related Documents:
- Profits tax computation sheet detailing the calculation of assessable profits.
- Supplementary forms (e.g., S1 to S18) for reporting specific matters, if required.
Filing and Submitting the Tax Return
The IRD issues different types of profits tax return forms based on business type:
- BIR51: For corporations (limited companies).
- BIR52: For non-corporate entities (sole proprietorships or partnerships).
- BIR54: For non-residents.
Upon receiving the tax return form, accurately complete all fields based on your prepared financial data, particularly income, allowable expenses, and assessable profits.
Generally, new businesses receive their first tax return approximately 18 months after commencement or incorporation, while ongoing businesses receive it annually on the first working day of April. The tax return must be submitted within one month from the issuance date. You may submit it via mail or through the IRD’s e-filing service, which typically offers an additional one-month extension.
FAQ
Who Needs to Pay Profits Tax?
Any person (company, partnership, sole proprietorship, freelancer, or self-employed individual) operating a trade, profession, or business in Hong Kong and deriving profits from Hong Kong must pay profits tax. Income from self-employment, sole proprietorships, and partnerships is also subject to profits tax.
What is Provisional Profits Tax?
Provisional profits tax is an arrangement where the IRD pre-collects a portion of the profits tax for the next assessment year based on the previous year’s assessed profits. If the actual tax liability exceeds the provisional amount paid, the difference must be settled; if the provisional tax is overpaid, it can be refunded or offset against the next year’s tax liability.
What’s the Difference Between Profits Tax and Salaries Tax?
- Profits Tax: Levied on profits from businesses, including companies, sole proprietorships, partnerships, and self-employed individuals, with a two-tiered tax rate and no personal allowances.
- Salaries Tax: Levied on individuals’ employment income (e.g., wages, salaries, allowances) in Hong Kong, with progressive rates (2% to 17%) or a standard rate (15%) and personal allowances (e.g., for children, parents, or charitable donations).
Do Businesses with Losses or No Profits Need to Pay Tax?
- If your business has no profits in the assessment year, no profits tax is payable. If the business incurs a loss, the loss can be carried forward to offset assessable profits in the next assessment year.
Do Businesses with Losses or No Profits Need to Pay Tax?
- Businesses must submit a profits tax return with supporting documents to the IRD within the specified deadline, via online, mail, or in-person submission. Late filing may result in penalties or fines.
