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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
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]
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.)
:-
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(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)]. |
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(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)]. |
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(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)].
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(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)]. |
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(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
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(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. |
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(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. |
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(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.
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(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-residents 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:-
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(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; |
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(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.; |
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(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:- |
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where the business does not cease but, in
whole or in part, is transferred to or carried on by another
person; |
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in the case of cessation occurring on or
after 1 April 1979 of a business which commenced before 1
April 1974. |
Exemption
The following income and profits are excluded
from the assessable profits:-
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dividends received from a corporation which
is subject to Hong Kong Profits Tax; |
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amounts already included in the assessable
profits of other persons chargeable to Profits Tax; |
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interest on Tax Reserve Certificates; |
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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;
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interest income and trading profits derived
from long term debt instruments;
and |
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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.
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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.
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:-
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domestic or private expenses and any sums
not expended for the purpose of producing the profits; |
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any loss or withdrawal of capital, the cost
of improvements and any expenditure of a capital nature; |
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any sum recoverable under insurance or contract
of indemnity; |
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rent of or expenses relating to premises
not occupied or used for the purpose of producing the profits;
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taxes payable under the Inland Revenue Ordinance,
except Salaries Tax paid in respect of employees' remuneration;
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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
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(1) |
Industrial Buildings Allowances
on Industrial Buildings and Structures |
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Initial allowance: 20% on the
cost of construction of the premises |
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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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(2) |
Commercial Buildings Allowances
on Commercial Buildings and Structures |
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Annual allowance: 4% on the
cost of construction of the premises |
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Balancing allowance or charge
will be due upon disposal of the premises |
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(3) |
Plant and Machinery |
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Initial allowance: 60% on the
cost |
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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". |
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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
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
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
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 2007/08) |
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Corporations: |
17.5% |
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Unincorporated Businesses: |
16% |
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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 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
Anti-Avoidance
Provisions
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(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. |
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(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. |
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(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
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
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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