Something You Need To Know About Hong Kong Profits Tax
Many people know that doing business in Hong Kong can enjoy low-tax and preferential tax rates
. The related tax is generally profits tax with 16.5% only, and reported once annually, not subject to VAT and sales tax. However, they are always confused on how to prepare the tax return since they are not familiar with the tax rules. In this article, we will make some detailed explanation of Hong Kong Profits tax, which is one of most important taxes in Hong Kong.
When you get to know profits tax, you should know who are required to pay, that is profits taxpayers. Under the "Inland Revenue Ordinance" from Inland Revenue Department, profits taxpayers mean persons, including corporations, partnerships, trustees and bodies of persons that profit from carrying on trade, profession or business in Hong Kong.
Then which scope you should prepare for the tax returns? Profits arising in or derived in Hong Kong from operating any business or service are subject to tax (except profits arising from or losses incurred by the sale of capital assets). In contrast, no tax is levied on profits arising abroad, even if they are remitted to Hong Kong. Whether the business operated in Hong Kong or whether profits derived from Hong Kong is mainly determined by operating facts.
When and How Much Rate should you pay the tax? You need to declare the profits for the basis period before the financial year. The financial year generally ends on 31 March or 31 December of each year, with a 12-month accounting period. However, the first accounting period for a newly set up company cannot exceed 18 months. The Profits tax rate for a limited company is 16.5%. And Profits tax rate for sole proprietorship or partnership is 15%.
When you prepare for the tax return, you should know some exemption and deduction of tax.
Exemption: Dividends or investment yield received from companies that have paid profits tax are not included in assessable profits ; Interest received on the deposits placed in authorized institutions is exempt from profits tax
Deductions: All expenses incurred by the taxpayer in the production of chargeable profits, to the extent that they are related to the operation, deductions which include: Interest expenditure on borrowings for the purpose of producing the profits; Bad and doubtful debts; Research and development expenses; Directors' emoluments.
There is one concept named Provisional Profits Tax Payment, which you also need to know. That is before a given tax year ended, the Inland Revenue Department will impose provisional profits tax on enterprises according to the tax payment assessed in the previous year. In the succeeding year, when the tax payment for the related year is appraised, the provisional tax paid will be used to pay the profits tax payable in that year.
Finally, the last thing you need to know is Tax Preferences. There are four facts that you can enjoy the tax preferences.
1.The initial depreciation accounts for 60% of capital expenditure in the purchase of machinery, instruments, equipment and other assets
2.Expenditure incurred in the purchase of computer hardware and software will be fully deducted according to facts
3.Capital expenditure incurred in the renovation of commercial buildings is allowed to deduct over a period of 5 years
4.If Hong Kong enterprises have goods processed by Mainland China companies through "contract processing" in China, then only 50% of the profits are assessed from a Hong Kong source, which are subject to profits tax
by: ken xu
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