Introduction to Profits Tax Return

Even though Hong Kong is named as one of the most tax-friendly systems in the world, let’s face it, as a business owner, it remains pretty complicated. You may even be subjected to financial penalties for failing to file the correct documents or within the correct time frame. In this article, we will take a closer look at Hong Kong’s profit tax system and aim to alleviate your confusion and get you prepared for the audit.

1. Hong Kong’s Two-tiered profits tax regime

The Inland Revenue Department (IRD) has introduced a two-tiered profit tax rate regime on December 29, 2017. With the aim to maintain a simple and low tax regime, as well as promoting economic development, the introduction of the two-tiered profit tax regime intends to reduce the tax burden on enterprises, with a particular focus on SMEs in Hong Kong. For corporations, the tax rate for the first HK$2 million of assessable profits will be 8.25%, and the remaining profits will be taxed at the existing 16.5% tax rate.

Accessible ProfitsCorporationsUnincorporated BusinessesFirst HK$2 million8.25%7.5%Over HK$2 million16.5%15%

2. Profits Tax Return Filing Timeline

Corporations, partnerships, trustees, and bodies of persons facilitating trade, profession or business in Hong Kong are legally required to be subjected to tax on all profits derived from Hong Kong. If you have recently formed a company in Hong Kong, you will receive your first Profit Tax Return approximately 18 months after the date of incorporation. You are required to submit your Tax Return (BIR51 or BIR52 or BIR54) along with an audit report to the IRD (The Inland Revenue Department) within 3 months from the day of the issue. Thereafter, your Profit Tax Return will be issued by the IRD on the first working day of April every following year. You are required to complete and file an audit report every year, within 1 month of the date of issue.

Date of issueDeadline for submissionInitial Profit Tax ReturnAbout 18 months from the date of incorporation3 months from the day of issueProfits Tax Return ThereafterFirst working day of April every year1 month from the day of issue

3. What should be included in the Profits Tax Return?

3.1. Profits Tax Return There are three series of Profits Tax return forms:

3.2. Audit Report

In Hong Kong, only a Certified Public Accountant (CPA) can perform the audit. In order for the CPA to perform a proper audit, correct management accounts are needed. In order to prepare for your audit, it is best practice to have a list of required documents prepared.

3.3. Checklist of Required Documents

An audit report is required even if the company has not generated any income. If the company has not yet commenced, you are allowed to report to the IRD as “not yet commenced” by the absence of an audit report. Once the business has been launched, you will be required to submit back the first and subsequent years’ financial statements to the IRD.

4. Basic Period The financial cut-off date for most Hong Kong companies is either December 31st or March 31st. 5. Deductions Profit tax is levied based on the assessable profit, excluding deductible expenses and tax-exempt incomes. While dividends (profits arising from the sale of capital assets and interest on deposits placed in authorised financial institutions) can be exempted from tax, there are other expenses that can be deducted from the assessable profit. Expenses that are incurred by the taxpayer in the production of chargeable profits are allowed as deductions (Reference to section 16 of the I.R.O.). Generally speaking, business expenses relating to your day to day business operations are deductible as your operating expenses, for example:

6. Penalties for Late Submission The Inland Revenue Department (“IRD”) may take punitive actions for failure to file the profits tax return by the due date:

Conclusion FastLane is a CPA firm that can provide audit services and assist in performing the tax computation and filing with IRD. After learning the basics of the Profit Tax Return, feel free to learn more about how an audit report is prepared!