Every April, businesses that operate in Hong Kong get Profit Tax Return forms from the Inland Revenue Department (IRD).
The tax return form’s first page contains the date of issuance. If the paperwork cannot be turned in by the deadline of one month, a request for an extension may be approved.
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Additionally, businesses have the option to use Hong Kong e-Tax to file their profit tax returns and additional documents online. The earnings tax return will be issued by the IRD 18 months following the date of formation if the firm is a recently registered entity.
The tax year in Hong Kong is different from the regular calendar year; it starts in April and ends on March 31 of the following year. Businesses may synchronize their financial and tax reporting with this April-to-March fiscal cycle thanks to this special fiscal cycle that corresponds with the Profit Tax Returns (PTRs). This calendar differs from the more popular one used in many other nations, which runs from January to December.
Let’s use an example to further explain this:
– Start of Tax Year: April 1, 2023
– End of Tax Year: March 31, 2024
A company operating in Hong Kong, such as “ABC Corporation,” would carry out its financial operations, make money, and spend money during this time. ABC Corporation is required to prepare and file its Profit Tax Return (PTR) for the tax year that ends on March 31, 2024.
Incentives for Taxation in Hong Kong
Hong Kong provides a number of tax breaks to encourage investment and economic expansion. Profit tax exemptions for both onshore and offshore investments in the city are included in these tax benefits. The following are some noteworthy tax breaks:
Exemption from Offshore Profits Tax:
Income from offshore activities is completely excluded from profits tax in Hong Kong. This exemption is available to overseas enterprises that do not generate revenue from Hong Kong.
Tax System for Two-Tier Profits:
As previously indicated, small and medium-sized enterprises are benefited by the two-tiered profits tax scheme, which gives lower tax rates for the first HK$2 million of assessable revenue.
Research and Development (R&D) Tax Deductions:
Businesses in Hong Kong that carry out eligible research and development (R&D) can deduct tax from their R&D expenses, which promotes technological innovation.
Capital Expenditure Deductions:
Over time, some capital expenses—like buying machinery and equipment—can be subtracted from assessable profits, which reduces the total amount of taxes owed.
Tax Breaks for Particular Sectors:
Hong Kong offers industry-specific incentives, such as lower tax rates or other perks, to entice investment in businesses including ship leasing, aircraft manufacturing, and film production.
Tax Refund for Any Exceeded Amount:
This may occur if an organization decides not to apply the two-tiered profits tax rates for the 2018–19 assessment year and subsequent years.
Tax Regime for Two-Tier Profits
Corporations and unincorporated enterprises are subject to the Two-Tier Profits Tax Regime, which was put into force by the Hong Kong Special Administrative Region (SAR) government in April 2018. The legislation was passed in order to drastically lower the taxes that Hong Kong’s Small and Medium-Sized Enterprises (SMEs) must pay.
Corporations are required to pay tax under the system on their first HKD 2 million of assessable profit at 50% of the old rate (8.25%). After HKD 2 million, any residual gains are subject to taxation at the 16.5% initial rate.
For unincorporated firms, the first HKD 2 million in assessable earnings is subject to tax at a rate equal to 50% of the original rate, or 7.5%. The remaining gains are subject to taxation at the old 15% rate after HKD 2 million.
Conclusionary terms
Companies are exempt from the two-tiered profits tax scheme under the following four categories:
Qualifying corporate treasury centers, insurance companies, ship and aircraft leasing companies, and other firms have already redeemed a half-tax rate under special tax regimes.
Interest, gains, and profits accruing to holders of eligible debt instruments should already be subject to half the tax rate (7.5% or 8.25%) on the assessable earnings.
Only one “entity” within the “connected entities” in the case of a group firm is eligible for the two-tier pricing. A distinct legal entity that is eligible for the two-tier tariffs must be chosen by the group.
Qualifying debt instruments (QDIs) produce income that is already tax-exempt or subject to a concessionary tax rate, which is equal to 50% of the regular profits tax rate (8.25% or 7.5%). They are therefore exempt from the two-tiered profits tax structure.
An entity is considered a “connected entity” of another entity by the Inland Revenue Department (IRD) if:
Each entity is in charge of the other.
Either one of the entities controls the other one or
If a person running a sole proprietorship is the first entity and that same person running another sole proprietorship firm is the second entity
If an entity directly or indirectly owns more than 50% of the issued share capital, voting rights, capital, or earnings in another entity, it is said to have “control” over that other entity.