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The Scope
of the Charge
Persons, including corporations,
partnerships, trustees and bodies of persons carrying on any trade,
profession or business in Hong Kong are chargeable to tax on all
profits (excluding profits arising from the sale of capital assets)
arising in or derived from Hong Kong from such trade, profession
or business. There is therefore no distinction made between residents
and non-residents. A resident may therefore derive profits from
abroad without suffering tax; conversely, a non-resident may suffer
tax on profits arising in Hong Kong. The question of whether a business
is carried on in Hong Kong and whether profits are derived from
Hong Kong is largely one of fact, however some guidance on the principles
applied can be found in cases which have been considered by the
Hong Kong Courts and the Privy Council. No tax is levied on profits
arising abroad, even if they are remitted to Hong Kong.
If a person sells his flat or any property as part of a scheme of
profit-making, it will be regarded as a business and he is required
to pay tax on any profit he may make.
More information:
A Simple Guide on The Territorial
Source Principle of Taxation
FAQ:
Companies Incorporated Outside Hong Kong
A
guide to Profits Tax for unincorporated businesses (1) [The "need-to-know"
for new businesses and commonly asked questions]
A
guide to Profits Tax for unincorporated businesses (2) [Which receipts
are taxable? Which expenses are deductible?]
A
guide to Profits Tax for unincorporated businesses (3) [Commonly
asked questions concerning partnership businesses]
Special
Provisions for Ascertaining Liability to Profits Tax
Certain Amounts Deemed to be Trading Receipts
The following sums are deemed to
be receipts arising in or derived from Hong Kong from a trade, profession
or business carried on in Hong Kong under the Inland Revenue Ordinance
(I.R.O.) :-
|
(1) |
Sums received from the exhibition
or use in Hong Kong of cinematography or television film or
tape, any sound recording or any advertising materials connected
with such film, tape, or recording [section 15(1)(a)]. |
|
(2) |
Sums received for the use
or right to use in Hong Kong any patent, design, trademark,
copyright material or secret process or formula or other of
a similar nature [section 15(1)(b)]. |
|
(3) |
Sums received for the use
or right to use outside Hong Kong any patent, design, trademark,
copyright material or secret process or formula or other of
a similar nature, which are deductible in ascertaining the
assessable profits of a person under Profits Tax (not applicable
to sums received or accrued before 25 June 2004) [section
15(1)(ba)]. |
|
(4) |
Sums received by or accrued
to a person carrying on business in Hong Kong by way of grant,
subsidy or similar financial assistance other than sums in
connection with capital expenditure [section 15(1)(c)]. |
|
(5) |
Sums received by way of hire,
rental or similar charges for the use of movable property
or the right to use movable property in Hong Kong [section
15(1)(d)]. |
Non-Residents and Agents Dealing with Non-Residents
|
(1) |
A non-resident is chargeable
to tax either directly or in the name of his agent in respect
of all his profits arising in or derived from Hong Kong, from
any trade, profession or business carried on there, whether
or not the agent has the receipt of the profits, and the tax
may be recovered out of the assets of the non-resident or
from the agent. The agent is required to retain from the assets
sufficient money to pay the tax. |
|
(2) |
A non-resident who receives
sums specified in sections 15(1)(a), (b) and (ba), and a non-resident
entertainer or sportsman who receives sums from the performance
in Hong Kong of an activity in his character as entertainer
or sportsman is chargeable to tax in the name of the person
who paid or credited the sums to the non-resident. The person
who pays or credits such sum is required at the time he makes
the payment or credit to deduct from those sums an amount
sufficient to meet the tax due. |
|
(3) |
Resident consignees are required
to furnish quarterly returns to the Commissioner showing the
gross proceeds from sales on behalf of their non-resident
consignors and to pay to the Commissioner a sum equal to one
per cent of such proceeds, or such lesser sum as may have
been agreed with the Commissioner. |
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(4) |
Where a non-resident carried
on business with a resident and the business is so arranged
that it produces to the resident either no profits or less
than the ordinary profits that might be expected to arise
to an independent concern, the business may be treated as
carried on in Hong Kong by the non-resident through the resident
as his agent. |
|
(5) |
Where the true profits of
a non-resident from a trade, profession or business carried
on in Hong Kong cannot be readily ascertained, they may be
computed on a fair percentage of the turnover in Hong Kong.
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(6) |
Where the accounts of a non-resident
whose head office is outside Hong Kong do not disclose the
true profits of a Hong Kong permanent establishment, the profit
of the branch for tax purposes is taken to be the amount which
bears to the taxpayer's total profits the same proportion
as his turnover in Hong Kong bears to his total turnover.
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More information:
Taxation
of Non-resident Entertainers and Sportsmen in Hong Kong
FAQ:
Companies Incorporated Outside Hong Kong
Assessable
Profits
The Assessable Profits (or
Adjusted Loss) are the net profits (or loss) [other than profits
(or loss) arising from the sale of capital assets] for the basis
period, arising in or derived from Hong Kong, calculated in accordance
with the provisions of Part IV of the I.R.O.
Basis Period
The Basis period is either:-
|
(1) |
the year ended 31 March during the relevant
year; |
|
(2) |
where the annual accounts
are made up to any day other than 31 March, the year ended
on that day in the relevant year; |
|
(3) |
where the accounts are made
up for each lunar year, the lunar year ended in the relevant
year; |
|
(4) |
where you commenced or ceased
to carry on a business or changed its accounting date, the
special period prescribed by sections 18C, 18D or 18E of the
I.R.O.; |
|
(5) |
for commencement case, if
accounts for this period have not been prepared the profits
to be returned may be calculated by apportioning the profits
shown by the accounts which cover the period; or |
|
(6) |
for cessation/transfer of business case,
special rules apply:- |
| - |
where the business does not
cease but, in whole or in part, is transferred to or carried
on by another person; |
| - |
in the case of cessation
occurring on or after 1 April 1979 of a business which commenced
before 1 April 1974. |
Exemption
The following sums are excluded from the assessable
profits:-
| - |
dividends received from a
corporation which is subject to Hong Kong Profits Tax; |
| - |
amounts already included
in the assessable profits of other persons chargeable to Profits
Tax; |
| - |
interest on Tax Reserve Certificates; |
| - |
interest on, and any profit
made in respect of a bond issued under the Loans Ordinance
(Cap. 61) or the Loans (Government Bonds) Ordinance (Cap.
64), or in respect of an Exchange Fund debt instrument or
in respect of a Hong Kong dollar-denominated multilateral
agency debt instrument; |
| - |
interest income and trading
profits derived from long term
debt instruments; and |
| - |
sums received or accrued
in respect of a specified investment scheme by or to the person
as: - |
| (i) |
a person chargeable to Profits
Tax in respect of a mutual fund, unit trust or similar investment
scheme that is authorized as a collective investment scheme
under section 104 of the Securities and Futures Ordinance
(Cap. 571); or |
| (ii) |
a person chargeable to Profits
Tax in respect of a mutual fund, unit trust or similar investment
scheme where the Commissioner is satisfied that the mutual
fund, unit trust or investment scheme is a bona fide widely
held investment scheme which complies with the requirements
of a supervisory authority within an acceptable regulatory
regime. |
A person is exempt from payment of profits tax
in respect of the following sums:-
| - |
interest (accrued on or after
22 June 1998) that is derived from any deposit placed in Hong
Kong with an authorized institution, excluding interest received
by or accrued to a financial institution; and |
| - |
starting from the year of assessment
2009/10, interest on and any profit made in respect of Renminbi
sovereign bonds. |
Deductions
Deductible Expenses
Generally, all outgoings
and expenses, to the extent to which they have been incurred
by the taxpayer in the production of chargeable profits, are
allowed as deductions. Reference can be made to section 16
of the I.R.O. |
A transfer of certain allowable
head office administrative expenses by means of a charge to
a local branch or subsidiary in Hong Kong would be allowed
as a deduction for Hong Kong tax purposes, to the extent to
which they were incurred during the basis period for the year
of assessment in the production of profits chargeable to tax.
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Non-deductible Items
In computing the assessable profits
deduction is specifically prohibited in respect of the following:-
| - |
domestic or private expenses
and any sums not expended for the purpose of producing the
profits; |
| - |
any loss or withdrawal of
capital, the cost of improvements and any expenditure of a
capital nature; |
| - |
any sum recoverable under insurance or contract
of indemnity; |
| - |
rent of or expenses relating
to premises not occupied or used for the purpose of producing
the profits; |
| - |
taxes payable under the Inland
Revenue Ordinance, except Salaries Tax paid in respect of
employees' remuneration; |
| - |
any remuneration or interest
on capital or loans payable to or, subject to section 16AA,
contribution made to a mandatory provident fund scheme in
respect of the proprietor or the proprietor's spouse or, in
case of a partnership, to its partners or their spouses. |
Expenditure on Building Refurbishment
A person who incurs capital expenditure
on the renovation or refurbishment of business premises is allowed
to deduct that expenditure over a period of 5 years in equal instalments
commencing in the year in which the expenditure is made.
Expenditure
on plant and machinery specially related to manufacturing, and on
computer hardware and software
For this kind of expenditure, a full
deduction is allowed in the basis period in which the expenditure
was incurred.
Expenditure on Environmental
Protection Facilities
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| (1) |
Expenditure on environmental protection machinery |
| |
- |
With effect from the year
of assessment 2008/09, a full deduction is allowed during
the basis period in which the expenditure is incurred. |
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| (2) |
Expenditure on environmental protection installation
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| |
- |
With effect from the year of assessment
2008/09, a deduction at 20% of the expenditure is allowed
in each of the 5 consecutive years commencing from the year
in which the expenditure is incurred. |
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| (3) |
Expenditure on environment-friendly vehicle |
| |
- |
With effect from the year of assessment
2010/11, a full deduction is allowed during the basis period
in which the expenditure is incurred. |
Depreciation Allowances
|
(1) |
Industrial Buildings Allowances
on Industrial Buildings and Structures |
| - |
Initial allowance: 20% on the
cost of construction of the premises |
| - |
Annual allowance: 4% on the
cost of construction of the premises |
| - |
Balancing allowance or charge
will be due upon disposal of the premises |
| |
|
|
(2) |
Commercial Buildings Allowances
on Commercial Buildings and Structures |
| - |
Annual allowance: 4% on the
cost of construction of the premises |
| - |
Balancing allowance or charge
will be due upon disposal of the premises |
| |
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|
(3) |
Plant and Machinery |
| - |
Initial allowance: 60% on the
cost |
| - |
Annual allowance:
at rates of 10%, 20% or 30% as prescribed by the Board of
Inland Revenue in the Inland Revenue Rules, on the reducing
value of the asset. Items qualifying for the same rate of
annual allowance are grouped under one "pool". |
| - |
A balancing
allowance is available only on cessation of a business to
which there is no successor. A balancing charge can, however,
arise whenever the disposal proceeds of one or more assets
exceed the reducing value of the whole "pool" of
assets to which the disposed items belong. |
Donations
Charitable donations made to approved
charitable institutions or trusts of a public character or to the
Government of the Hong Kong Special Administrative Region, amounting
in aggregate not less than $100 but not exceeding 35% (10% for years
of assessment up to and including 2002/03; and 25% for years of
assessment 2003/04 to 2007/08) of the adjusted assessable profits
before deduction of donations, are allowable for deduction in computing
the assessable profits.
More information:
Specified Rate of Interest for the Purposes
of Section 16(2)(b) of the IRO
Approved Institutes under Section 16B and
16C of IRO
Stock Exchanges and Major Financial Centres
outside Hong Kong
FAQ: Keyman Insurance Policy
DIPN 5 (Revised) : Profits Tax Deductions
FAQ : Tax Deduction for Environment-friendly
Vehicles
Special Provisions Applicable
to Certain Trades and Businesses
The following are special provisions
made in the I.R.O. for ascertaining assessable profits of some particular
trades and businesses:-
| Relevant Section in
I.R.O. |
Trades / Businesses
|
| S.23 |
Life insurance companies |
| S.23A |
Insurance companies other than life
insurance companies |
| S.23AA |
Mutual insurance corporations |
| S.23B |
Ship-owners |
| S.23C |
Resident aircraft-owners |
| S.23D |
Non-resident aircraft-owners |
| S.24 |
Clubs and trade associations |
More information:
Income Arising from Insurance Business Classes
G and H
Charge of Profits Tax
on Qualifying Debt Instruments (QDI)
With effect from 24 May 1996, interest
income and trading profits derived from a debt instrument issued
in Hong Kong with an original maturity of not less than 5 years
are subject to a concessionary tax rate equivalent to 50% of the
normal profits tax rate. Commencing from the year of assessment
2003/04, this concession is expanded to cover a "medium term
debt instrument" issued in Hong Kong on or after 5 March 2003
having an original maturity of less than 7 years but not less than
3 years. In addition, interest income and trading profits derived
from a "long term debt instrument" issued in Hong Kong
on or after 5 March 2003 with an original maturity of not less than
7 years are exempt from profits tax.
From 25 March 2011 onwards, the 50% tax concession
further extends to cover interest income and trading profits derived
from a "short term debt instrument" issued on or after
that date with a tenor of less than 3 years. The existing tax concession
for "medium term debt instrument" and tax exemption for
"long term debt instrument" issued before 25 March 2011
remain the same. However, the tax concession and exemption will
not apply in relation to a QDI issued on or after 25 March 2011
if, at the time during which the interest income and trading profits
is/are so received or accrued, the person is an associate of the
issuer of the QDI.
Debt instruments that qualify for the above tax
concession and exemption are specified in sections 14A(4) and 26A(2)
of the Inland Revenue Ordinance respectively.
More information:
List of Qualifying Debt Instruments
FAQ: Qualifying Debt Instruments
Treatment
of Losses
Losses made in an accounting year
are to be carried forward and set off against future profits of
that trade but a corporation carrying on more than one trade may
have losses in one trade offset against profits of the other. For
gains or losses which are subject to concessionary tax rate, there
are special provisions on the adjustment of losses between concessionary
trading activities and normal trading activities. An individual
who incurs a trading loss and who claims Personal
Assessment will have the loss allowed as a deduction from
his total income.
Profits Tax
Rate
| (1) |
Normal rate (for
the year of assessment 2008/09 onwards) |
|
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Corporations: |
16.5% |
|
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Unincorporated Businesses: |
15% |
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| (2) |
Concessionary
rate |
|
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A tax rate at
50% of the normal profits tax rate will be applied to trading
profits and interest income received or derived from qualifying
debt instruments issued in Hong Kong, and to offshore business
of professional reinsurance companies. |
All taxpayers are subject to the
same corporation or unincorporated business tax rate irrespective
of their residential status.
However, any permanent or temporary
resident of Hong Kong except a person under the age of 18 (unless
both his parents have passed away) may obtain relief from the standard
rate of tax on his profits and income by electing to be
assessed under Personal Assessment.
An election may offer relief where the tax computed under Personal
Assessment is less than the aggregate amount of the tax charged
separately under Profits Tax, Salaries Tax and Property Tax.
More information:
Tax Rates for the Latest 7 Years
Provisional
Profits Tax
Profits tax is chargeable on
the assessable profits for each year of assessment. As the assessable
profits for any particular year cannot be known until after the
end of the year concerned, a provisional tax charge has to be raised.
When the assessable profits for the year of assessment are subsequently
ascertained, an assessment will be made and the provisional profits
tax paid will be utilized to offset the tax liability under the
assessment.
More information:
Holding
Over of Provisional Tax
Anti-Avoidance
Provisions
|
(1) |
Section 61 of the I.R.O.
tackles any transaction which reduces or would reduce the
amount of tax payable by any person where the Assessor is
of the opinion that the transaction is artificial or fictitious
or that any disposition is not in fact given effect to. When
it applies, the Assessor may disregard any such transaction
or disposition and the person concerned shall be assessable
accordingly. |
|
(2) |
Section 61A of the I.R.O.
applies to any transaction entered into after 13 March 1986
for the sole or dominant purpose of enabling a person to obtain
a tax benefit. Where it applies, the section provides for
an assessment to be made as if the transaction had not been
entered into or carried out or in such other manner as the
Assistant Commissioner considers appropriate to counteract
the tax benefit which would otherwise be obtained. |
|
(3) |
Section 61B of the I.R.O.
gives effect to a policy of restricting the trafficking in
loss companies for the purpose of tax avoidance. The section
is aimed at the situation where companies with accumulated
tax losses are sold for their losses to the proprietors of
businesses which are trading profitably. Once ownership of
the loss company has changed hand, the profitable business
is introduced into the company and the losses brought forward
are set off against profits derived. The section restricts
this avoidance practice by allowing the Commissioner to refuse
to set off losses brought forward where he is satisfied that
the sole or dominant purpose of a change in shareholding is
the utilisation of those losses to obtain a tax benefit. |
Advance Rulings
A person may apply to the Commissioner,
subject to payments and certain regulations, for a ruling on how
any provision of the Inland Revenue Ordinance applies to him or
the arrangement specified in the application.
More information:
Policies: Advance Rulings
Advance Rulings Cases
Useful Information
A Simple Guide on The Territorial
Source Principle of Taxation
FAQ: Keyman Insurance Policy
Income Arising from Insurance Business Classes
G and H
Tax Treatment for Defined Benefit Retirement
Schemes
Average Exchange Rates of Foreign Currencies
for Profits Tax Purposes
Frequently Asked Questions
Public Forms: Profits Tax
Pamphlets: Profits Tax
Enquiries
Written enquiries relating to Profits
Tax may be sent to us by post at GPO Box 132 or via e-mail at taxpf@ird.gov.hk
. For enquiries via electronic media, please also refer to our web
page on Electronic Submission of Information
for details on the prescribed format, manner and procedures of filing
electronic documents.
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