Profits Tax

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.

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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.) :-

Sums received from the exhibition or use in Hong Kong of cinematography or television film or tape, sound recording or their connected advertising materials [section 15(1)(a)].
Sums received for the use, or the right to the use, in Hong Kong of any patent, design, trade mark, copyright material, *layout-design (topography) of an integrated circuit, *performer's right, *plant variety right, secret process or formula [section 15(1)(b)].
Sums received for the use, or the right to the use, outside Hong Kong when such sums are deductible in ascertaining the assessable profits of a person under Profits Tax, of any patent, design, trade mark, copyright material, *layout-design (topography) of an integrated circuit, *performer's right, *plant variety right, secret process or formula [section 15(1)(ba)].
Sums for an assignment of, or an agreement to assign, a performer's right in relation to a performance given by a performer in Hong Kong on or after 29 June 2018 and the sums were paid or accrued to the performer or an organizer [section 15(1)(bb)].
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)].
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)].

(*not applicable for sums received or accrued before 29 June 2018)

Non-Residents and Agents Dealing with Non-Residents

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.
A non-resident who receives sums specified in section 15(1)(a), (b), (ba) and (bb), or 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.
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.
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.
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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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:-

the year ended 31 March during the relevant year;
where the annual accounts are made up to any day other than 31 March, the year ended on that day in the relevant year;
where the accounts are made up for each lunar year, the lunar year ended in the relevant year;
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.;
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
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;
interest, profits or gains from qualifying debt instruments (issued on or after 1 April 2018) exempted from payment of Profits Tax; and
sums received or accrued in respect of a specified investment scheme by or to the person as: -
1. 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
2. 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.

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 I.R.O., 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

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.
Expenditure on environmental protection installation
- 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.
- With effect from the year of assessment 2018/19, a full deduction is allowed during the basis period (instead of over five years) in which the expenditure is incurred for procuring environmental protection installations [including any part of expenditure on environmental protection installation that remains to be deducted (and is to be fully deducted) in the year of assessment 2018/19].
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

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
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
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.

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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:-

Special Provisions Applicable to Certain 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

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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.

From 1 April 2018 onwards, the tax exemption available for QDI has been expanded. Interest income and trading profits derived from a QDI issued on or after 1 April 2018, regardless of its tenor, are all exempt from profits tax. However, the exemption will not apply 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 issue 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 I.R.O. respectively.

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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.

Profits Tax Rate

Profits Tax Rate
(1)	Normal rate (for the year of assessment 2008/09 onwards)
		Corporations:	16.5%
		Unincorporated Businesses:	15%

	Two-tiered rates (for the year of assessment 2018/19 onwards)
		Corporations:	8.25% on assessable profits up to $2,000,000; and 16.5% on any part of assessable profits over $2,000,000
		Unincorporated Businesses:	7.5% on assessable profits up to $2,000,000; and 15% on any part of assessable profits over $2,000,000

(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 "short / medium term debt instruments" (issued before 1 April 2018); qualifying profits of a qualifying corporate treasury centre (for the year of assessment 2016/17 onwards); qualifying profits of a qualifying aircraft lessor or a qualifying aircraft leasing manager (for the year of assessment 2017/18 onwards); qualifying profits of a professional reinsurer or authorized captive insurer (for the year of assessment 2018/19 onwards); and qualifying profits of a specified insurer or licensed insurance broker company (for the year of assessment 2020/21 onwards). A tax rate at 0% or 50% of the normal profits tax rate, as the case may be, will be applied to: qualifying profits derived by a qualifying ship lessor or a qualifying ship leasing manager from their qualifying activities (for the year of assessment 2020/21 onwards); and qualifying profits derived by a qualifying ship agent, a qualifying ship manager, or a qualifying ship broker from their qualifying activities (for the year of assessment 2022/23 onwards). A tax rate at 0% will be applied to: trading profits and interest income received or derived from qualifying debt instruments (issued on or after 1 April 2018); net eligible carried interest derived by a qualifying person under specified conditions (for the year of assessment 2020/21 onwards); and assessable profits arising from qualifying transactions and incidental transactions derived by eligible family-owned investment holding vehicles managed by eligible single family offices in Hong Kong, or family-owned special purpose entities (for the year of assessment 2022/23 onwards). Subject to the enactment and operation of the relevant legislation, the concessionary profits tax rate for eligible intellectual property income for the year of assessment beginning on or after 1 April 2023 is 5%.

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.

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Holding Over of Provisional Tax

Anti-Avoidance Provisions

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.
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.
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 I.R.O. applies to him or the arrangement specified in the application.

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Useful Information

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.

The Department will not accept underpaid mail items. Please pay sufficient postage to ensure your mail items can duly reach us. (Details)