Hong Kong Tax Guide: Profits Tax Return

In our last article, we gave an introduction on Profits Tax Returns in Hong Kong to provide a basic understanding on how an audit can help facilitate the profit tax payment process. In this article, we look to expand on the different types of profits tax returns to provide greater clarity on their differences and the particulars surrounding the profits tax filing process.
Every April, companies carrying out business in Hong Kong are issued with Hong Kong profit tax returns from the Hong Kong Inland Revenue Department (“IRD”). In this article, we look to explore the different types of profits tax returns, and what you should know when submitting them.

1. Profits Tax Return
Hong Kong profits tax is levied on all profits arising in, or derived from Hong Kong and is chargeable to all persons, professions or businesses in Hong Kong (excluding profits arising from the sale of capital assets). Individuals who are self-employed (those who work for themselves and are not an employee), will be liable to profits tax.

The IRD issues three series of profits tax return forms. When completing and filing their profits tax returns, taxpayers should pay attention to the following:

1.1 Profits Tax Return – Corporations (BIR51)

• Applicable to corporations who operate, or have a presence in Hong Kong
• Small corporations and dormant companies are not required to supply supporting documents when filing their profits tax returns
• Small corporations and dormant companies must continue to prepare their audited financial statements and tax computation before completion and submission of BIR51

• Applicable to corporations who operate as a partnership that has a presence in Hong Kong
• Businesses that changed from a partnership to a sole proprietorship or vice versa during the year, should report their profits / (loss) for the full basis period of the year of change in BIR52, not BIR60 (applicable to individual taxpayers)
• Companies preparing their financial accounts in a foreign currency should use the yearly average rate as at the account closing date

1.3 Profits Tax Return – In Respect of Non-Resident Persons (BIR54)

• Applicable to non-resident persons who have chargeable income arising in, or derived from a trade, profession or business carried on in Hong Kong
• The IRD has long accepted the term “non-resident person” to refer to a person who has no permanent business presence in Hong Kong
• For example, aA BVI incorporated company should not be regarded as a non-resident if its directors are resident in Hong Kong and its central management and control is in Hong Kong

2. How Do I Complete and File My Profits Tax Return?
When completing and filing a profits tax return, the profits tax return, supporting documentation (Audit Report and Profits Tax Computations) and any required supplementary forms should be submitted to the IRD within 1 month from the date printed on the profits tax return. The exact date of submission can be found on page 1 of a profits tax return.

As 1 month may not be adequate time for a business to complete their profits tax return, an extension may be granted upon request. At the beginning of each year, the IRD publishes a Circular Letter to tax representatives setting out the details of the block extension scheme and how tax representatives may help their clients apply.

3. Supplementary Forms
When completing and submitting a profits tax return, oftentimes a supplementary form is required to support a taxpayers claim of a preferential regime and tax incentive.

4. How do I know if I manage a dormant company? What are my Tax Obligations?
The IRD defines a “dormant” company to be a Hong Kong limited company that, in legal terms, has “no significant accounting transactions” during a financial year. In other words, companies who have no entries in their company accounting records are considered dormant. Sums paid in relation to the issuance of shares and annual company maintenance fees with the Hong Kong Companies Registry are not considered as significant accounting transactions.

Despite their status, dormant companies must adhere to their Hong Kong tax obligations and file tax returns when required to do so by the IRD. However, as previously stated, when a dormant company is completing their annual Hong Kong tax returns, they are not required to submit their audited financial statements and tax computations.

5. Penalties for non-compliance
In the event that a taxpayer fails to uphold their tax obligations, such as failing to maintain sufficient business records of income and expenditure, makes an incorrect return without reasonable error or fails to comply with the requirements of a notice, a fine may be presented. While the penalties and fines may vary, the maximum penalty is HKD 50,000 plus a further fine of 3 times the undercharged amount and imprisonment for 3 years.

Conclusion
Completing tax returns can be an intimidating process for companies and individual taxpayers alike. Everyone is scared of making a mistake, especially when they can be so costly!