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Tax Information : Profits Tax

Profits Tax
  The Scope of the Charge
  Special Provisions for Ascertaining Liability to Profits Tax
  Assessable Profits
  Basis Period
  Exemption
  Deductions
  Special Provisions Applicable to Certain Trades and Businesses
  Charge of Profits Tax on Qualifying Debt Instruments
  Treatment of Losses
  Profits Tax Rate
  Provisional Profits Tax
  Anti-Avoidance Provisions
  Double Taxation Relief
  Advance Rulings
  Useful Information
    A Simple Guide on The Territorial Source Principle of Taxation
    Profits Tax Treatments on Cross-border Manufacturing and Trading Businesses
    FAQ: Keyman Insurance Policy
    Income Arising from Insurance Businesses Classes G and H
  Enquiries

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
Profits Tax Treatments on Cross-border Manufacturing and Trading Businesses
FAQ: Companies Incorporated Outside Hong Kong
A guide to Profits Tax for unincorporated businesses (1) [The "need-to-knows" 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]

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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.

(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.

(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.

More information:
Taxation of Non-residents Entertainers and Sportsmen in Hong Kong
FAQ: Companies Incorporated Outside Hong Kong

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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.

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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.

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Exemption

The following income and profits 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.

Interest Income Exemption from Payment of Profits Tax

Interest (accrued on or after 22 June 1998) derived from any deposit placed in Hong Kong with an authorized institution is exempt from payment of Profits Tax. This exemption, however, does not apply to interest received by or accrued to a financial institution.

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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.

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

Immediate write off in full is to be allowed.

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

   
(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 25% (10% for years of assessment up to and including 2002/03) of the assessable profits, are allowable for deduction from 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

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Special Provisions Applicable to Certain Trades and Businesses

The followings 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

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Charge of Profits Tax on Qualifying Debt Instruments

Trading profits and interest income derived from debt instruments issued in Hong Kong with an original maturity of not less than 5 years will be chargeable to tax at a concessionary rate, being 50% of the normal profits tax rate. Commencing from the year of assessment 2003/04, this concession extends to cover debt instruments that are issued in Hong Kong on or after 5 March 2003 and have an original maturity of less than 7 years but not less than 3 years. Debt instruments that qualify for this concessionary treatment are specified in section 14A(4) of the I.R.O.

Commencing from the year of assessment 2003/04, trading profits and interest income derived from "long term debt instruments" 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. Long term debt instruments that qualify for this exemption are specified in section 26A(2) of the I.R.O.

More information:
List of Qualifying Debt Instruments

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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.

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Profits Tax Rate

(1) Normal rate (for the year of assessment 2007/08)
  Corporations: 17.5%
  Unincorporated Businesses: 16%
 
(2) Concessionary rate
  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

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Provisional Profits Tax

Profits Tax is chargeable on the actual profits of the year. As the profits for any particular year cannot be known until after the year end, a provisional tax charge is raised during the course of the year. In the following year, when the profits of the previous year are ascertained an assessment is made and credit given for the provisional tax paid.

More information:
Holdover of Provisional Tax

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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.

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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

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Useful Information

A Simple Guide on The Territorial Source Principle of Taxation
Profits Tax Treatments on Cross-border Manufacturing and Trading Businesses
FAQ: Keyman Insurance Policy
Income Arising from Insurance Business Classes G and H
Average Exchange Rates of Foreign Currencies for Profits Tax Purposes
Frequently Asked Questions
Public Forms: Profits Tax
Pamplets: Profits Tax

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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 Submission of Electronic Information for details on the prescribed format, manner and procedures of filing electronic documents.


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2003 | Important notices | Privacy policy Last revision date: 15 August 2008