Corporate tax rate in Hong Kong: A guide for entrepreneurs

Understanding the Hong Kong corporate tax system

Before diving into Hong Kong's corporate tax rates, you need to understand how the system is governed, so you know exactly what is subject to tax when running a business in the region.

The legal foundation for all taxation in Hong Kong is the Inland Revenue Ordinance (IRO). This legislation details the rules and regulations for the three main types of direct tax: Profits Tax, Salaries Tax, and Property Tax. For businesses, the primary focus is the Profits Tax².

The core principle underpinning Hong Kong's tax system is its territorial basis of taxation. This is a critical differentiator from many other global economies. It means that a company is only liable to pay tax on profits that are "arising in or derived from" Hong Kong. Profits sourced from outside Hong Kong are generally not subject to Hong Kong Profits Tax, even if they are remitted to Hong Kong. This principle makes it an ideal hub for managing international business operations³.

Key elements of the system include²:

• Year of Assessment: The standard tax year in Hong Kong runs from April 1st to March 31st of the following year.
• Basis Period: The basis period for calculating profits tax is typically the company's own fiscal year that ends within the year of assessment. For example, if a company's accounting year ends on December 31st, 2024, this period will form the basis for the 2024/25 year of assessment.
• Governing Body: The Inland Revenue Department (IRD) is the government agency responsible for administering the IRO, issuing tax returns, assessing taxes, and collecting revenue.

Corporate tax rates in Hong Kong

While Hong Kong is known for its low flat tax rate, the implementation of a two-tiered profits tax regime in 2018 made it even more competitive, particularly for SMEs. This system applies different rates to the first portion of profits compared to the remainder.

The rates are applied as follows⁴:

For Corporations:

• The first HK$2 million of assessable profits are taxed at 8.25%.
• Any remaining profits beyond HK$2 million are taxed at the standard rate of 16.5%.

For Unincorporated Businesses (e.g., partnerships and sole proprietorships):

• The first HK$2 million of assessable profits are taxed at 7.5%.
• Any remaining profits beyond HK$2 million are taxed at the standard rate of 15%.

It's important to note that to prevent abuse, the two-tiered rates are only applicable to one entity nominated from a group of "connected entities."

Provisional profits tax

To manage cash flow for both the government and taxpayers, Hong Kong operates a Provisional Profits Tax system. This is not a separate tax but rather an estimated prepayment of the next year's tax liability⁵.

When the IRD issues a tax assessment, it will include the final tax for the completed assessment year and a provisional tax for the upcoming year. The provisional tax is typically based on the assessable profits of the preceding year. This amount is usually payable in two instalments: the first being 75% of the liability and the second being the remaining 25%.

If a company's profits for the current year are expected to be significantly lower than the previous year (by more than 10%), it can apply to the IRD to hold over or reduce its provisional tax payment⁵.

Tax incentives in Hong Kong

Beyond the low headline rates, Hong Kong's tax system includes numerous incentives designed to encourage investment, innovation, and economic activity. These primarily come in the form of generous deductions, a wide network of tax treaties, and specific income exemption regimes

Deductions and allowances

To arrive at the "assessable profits," companies can deduct a wide range of expenses, provided they were incurred in the production of taxable profits. This lowers the overall tax burden.

Common deductible expenses include⁶ ⁷:

• Salaries, wages, and employee benefits
• Rent for office or business premises
• Interest on loans used for the business
• Repair and maintenance of business assets
• Bad debts written off
• Trademark and patent registration fees
• Research and Development (R&D) expenditures, which enjoy enhanced tax deductions (e.g., up to 300% for qualifying expenditure).

In addition to operational expenses, companies can also claim Capital Allowances (also known as depreciation allowances) on capital assets like plant, machinery, and computer equipment. This includes an Initial Allowance of 60% of the cost in the year of purchase, followed by Annual Allowances on a reducing balance basis. Maintaining meticulous records of all expenses and capital purchases is crucial to maximising these claims⁸.

Double tax prevention treaties

To solidify its status as an international business hub and prevent businesses from being taxed twice on the same income, Hong Kong has established an extensive network of Comprehensive Double Taxation Agreements/Arrangements (CDTAs) with over 40 jurisdictions worldwide, including major economies like Mainland China, the UK, Canada, Japan, and many European nations⁹.

These treaties serve several key purposes:

• Prevent Double Taxation: They allocate taxing rights between Hong Kong and the treaty partner, ensuring income is not taxed in both jurisdictions.
• Provide Tax Relief: Where income remains taxable in both places, the CDTA provides for tax credits to offset the tax paid in one jurisdiction against the liability in the other.
• Reduce Withholding Taxes: They often lower or eliminate withholding taxes on dividends, interest, and royalties paid between the two jurisdictions.
• Enhance Certainty: They create a clear and stable tax framework for international trade and investment.

Businesses operating across borders must understand the specifics of the relevant CDTA to ensure they are compliant and can take full advantage of the protections offered.

Income exemption FSIE regime

In response to evolving international tax standards aimed at curbing cross-border tax evasion, Hong Kong introduced the Foreign-Sourced Income Exemption (FSIE) regime, effective from January 1, 2023, with refinements made in 2024. This regime modifies Hong Kong's pure territorial taxation principle for certain types of passive income¹⁰.

Under the FSIE regime, 4 specific types of foreign-sourced income are deemed taxable in Hong Kong when received by a multinational enterprise (MNE) entity in Hong Kong, regardless of whether they are remitted:

• Interest
• Dividends
• Disposal Gains from the sale of equity interests
• Intellectual Property (IP) Income

However, this income can remain exempt from Profits Tax if the company meets certain conditions:

• Economic Substance Requirement: The company must demonstrate that it has adequate economic substance in Hong Kong. This is measured by having a sufficient number of qualified employees and incurring adequate operating expenditure in Hong Kong relative to the income-generating activity.
• Participation Exemption: For foreign-sourced dividends and equity disposal gains, an exemption is available if the Hong Kong entity has held at least 5% of the equity in the foreign company for a continuous period of at least 12 months.
• Nexus Approach: For qualifying foreign-sourced IP income, an exemption is granted based on the proportion of qualifying R&D expenditure incurred in Hong Kong.

This regime adds a layer of complexity, and MNEs with foreign-sourced income must carefully assess their operations to ensure compliance or meet the exemption requirements.

Tax compliance in Hong Kong

While the tax system is simple, compliance is taken very seriously by the IRD. Strict adherence to tax laws is essential for maintaining a good corporate reputation and avoiding significant penalties.

Key compliance obligations for companies include¹¹ ¹²:

• Timely Filing: Submitting the annual Profits Tax Return (PTR) and any other required forms by the specified deadlines.
• Accurate Reporting: Ensuring all information provided to the IRD is complete and accurate.
• Record Keeping: Maintaining sufficient business records in English or Chinese for at least seven years. This includes accounting records, bank statements, invoices, and contracts.
• Timely Payment: Paying the final and provisional tax by the due dates specified on the demand note.
• Notification of Changes: Informing the IRD of any changes to the business, such as a change of address, business name, or cessation of business.

Failure to comply can result in estimated assessments, financial penalties, fines, and even imprisonment in severe cases of tax evasion.

How to file corporate tax in Hong Kong

The corporate tax filing process in Hong Kong is a structured annual cycle. Here is a simplified step-by-step overview¹³:

• Receive the Profits Tax Return (PTR): The IRD typically issues PTRs to companies on the first working day of April each year. The specific form is BIR51 for corporations. A newly incorporated business will usually receive its first PTR about 18 months after its date of incorporation.
• Prepare Required Documents: The filing deadline is usually one month from the date of issue on the PTR. However, most companies utilising a tax representative can secure an extension under the Block Extension Scheme. The primary submission package must include:
  
  • The completed and signed Profits Tax Return form.
  • A certified copy of the company’s audited financial statements. This is a mandatory requirement for all incorporated companies in Hong Kong.
  • A tax computation that starts with the accounting profit from the financial statements and makes adjustments for non-deductible expenses and non-taxable income to arrive at the assessable profit.
  • Supporting schedules as required (e.g., for depreciation allowances).
• Submit the Return: The completed package can be submitted either by mail as a paper filing or electronically through the IRD’s eTAX portal. E-filing is encouraged and often provides a longer extension.
• Receive the Notice of Assessment: After reviewing the return, the IRD will issue a Notice of Assessment. This document will state the final assessable profits, the tax payable for the year, and the demand for provisional tax for the next year.
• Pay the Tax: The company must settle the tax liability by the due dates shown on the assessment notice. Payment can be made through various channels, including online banking, PPS, ATM, or by post.

Keep your financials clear and tax-ready with Aspire

Navigating the corporate tax system in Hong Kong is essential if you’re operating in the region. But effective tax compliance starts with clear financial reporting and proper recordkeeping, so you can accurately determine your assessable profits.

From our experience, we’ve seen how small and new businesses often struggle with preparing financial reports, mainly because of manual processes. These practices are not only time-consuming but also prone to human error, resulting in inaccurate financial data and misinformed decision-making.

This is where Aspire’s Business Account can help. It streamlines manual processes and gives you full visibility over your finances, enabling you to prepare more accurate, tax-ready financial reports.

With Aspire, you can:

• Get a complete view of your cash inflows and outflows, including the status of accounts payable, receivable, and recurring payments, in real time. This makes it easier to create and categorise cash flows for your cash flow statements.
• Gain real-time visibility into business expenses and invoice statuses.
• Simplify cross-border payments and international transactions with detailed, upfront invoice documentation.
• Save up to 50% of time spent on manual accounting tasks with smart automation.
• Eliminate manual data entry entirely through real-time syncing with Xero and QuickBooks.

With Aspire, you can spend less time on administrative tasks and more time growing your business.