The essential guide to understanding Hong Kong sole proprietorship tax

What is a sole proprietorship?

A sole proprietorship is the simplest form of business structure in Hong Kong, owned and operated by a single individual. Legally, there's no distinction between the owner and the business itself. This means the owner has complete control over all business decisions and is entitled to all the profits.

Key characteristics of a sole proprietorship include ^1,2:

• Single Ownership: The business is owned by one person.
• Ease of Setup: The registration process is straightforward and cost-effective. You simply need to complete the sole proprietorship registration with the Inland Revenue Department’s (IRD) Business Registration Office within one month of commencing business.
• Unlimited Liability: This is the most crucial aspect to understand. Because there is no legal separation between the owner and the business, you are personally responsible for all business debts and liabilities. If the business incurs losses or is sued, your personal assets, such as your home or savings, could be at risk to cover these debts. In contrast, a limited company is a separate legal entity, so its liabilities are distinct from those of its owners.
• Taxation: The business profits are treated as the owner’s personal income and are taxed under the Profits Tax regime. There is no separate corporate tax.

Depending on your business type and industry, obtaining a business license may also be required after registration ³.

While the unlimited liability factor requires careful consideration, the low start-up costs and minimal administrative burden make sole proprietorships a popular choice for new entrepreneurs testing a business idea or individuals offering personal services.

If your business grows or changes, you may consider transitioning to a partnership business or incorporating a limited company, which involves different tax forms and compliance requirements.

Business registration for sole proprietorships in Hong Kong

Registering your sole proprietorship in Hong Kong is a simple yet essential step to start your business operations legally. As a sole proprietor, you must register your business with the Business Registration Office at the Inland Revenue Department within 1 month of commencing business. This process involves submitting an application form with your chosen business name, which must not conflict with any existing trademarks. Once approved, you will receive a Business Registration Certificate—usually within 24 hours—which serves as official proof of your business registration ⁴.

It's a legal requirement to display your Business Registration Certificate prominently at your business premises. This certificate not only legitimises your business but also signals to clients and partners that you are operating in compliance with Hong Kong regulations. Remember, as the sole owner, you're personally liable for all business debts and obligations, so ensuring your business registration is in order is crucial for protecting your interests and maintaining trust with stakeholders ⁵.

Licensing and permits required for sole proprietorships

Depending on the nature of your business, you may need to obtain specific licenses or permits before you can legally operate your sole proprietorship in Hong Kong. For instance, if you plan to run a restaurant or food-related business, you will need a license from the Food and Environmental Hygiene Department. Similarly, businesses in construction, education, retail, or import/export may require permits from relevant government departments ³.

It is the responsibility of the sole proprietor to research and secure all necessary licenses and permits before starting business operations. Failing to comply with licensing requirements can result in fines, penalties, or even the forced closure of your business. Because requirements can vary depending on your business activities, seeking professional advice is highly recommended to ensure you meet all legal obligations and avoid costly mistakes. Many sole proprietors benefit from consulting with business advisors or legal professionals to navigate the licensing landscape in Hong Kong.

Setting up a business bank account

Opening a dedicated business bank account is a best practice for sole proprietorships in Hong Kong, as it helps keep your business finances separate from your personal funds. This separation is vital for accurate tax reporting, easier financial management, and building credibility with clients and suppliers.

To open a business bank account, the sole proprietor typically needs to provide identification documents, business registration documents (such as the Business Registration Certificate), and proof of address. Some banks may also request additional information or a minimum deposit, so it’s important to check the specific requirements of each bank. Hong Kong offers a range of options, from traditional banks to modern virtual banks, each with different services and fee structures.

Before choosing a bank, compare account features, fees, online banking capabilities, and customer support to find the best fit for your business needs. Having a dedicated business account not only streamlines your business operations but also ensures you are well-prepared for annual tax returns and financial reviews ^6,7.

Tax benefits of a sole proprietorship in Hong Kong

Choosing a sole proprietorship in Hong Kong offers several distinct tax advantages that can be highly beneficial, especially if you run a small business or startup. All income earned by the business is subject to profits tax, and you need to comply with tax laws to avoid penalties.

1. Simplicity in tax filing

Unlike corporations, which have more complex tax filing requirements, a sole proprietorship’s profits are reported on the owner’s individual tax return (Form BIR60). As a self-employed person, you must accurately declare your business income and expenses on your individual tax return.

The business profits are simply declared in a specific section of this form. This consolidated approach simplifies the annual tax compliance process, saving time and potentially reducing professional fees for tax preparation ⁸.

2. Application of two-tiered profits tax rates

To support small and medium-sized enterprises (SMEs), Hong Kong implemented a two-tiered profits tax regime. For unincorporated businesses like sole proprietorships, this system offers a significantly lower tax rate on initial profits. For the year of assessment 2024/25, the rates are ⁹: 

• 7.5% on the first HK$2 million of assessable profits.
• 15% on the remaining assessable profits.

This two-tiered system means that as a sole proprietor, your initial earnings are taxed at half the standard rate, providing substantial tax savings that can be reinvested into the business. For example, if your business has an assessable profit of HK$2 million, your tax liability would be HK$150,000 (HK$2,000,000 * 7.5% of tax rates), compared to HK$300,000 under a flat 15% rate.

3. Setting off business losses

One of the most significant tax benefits is the ability to offset business losses. If your sole proprietorship incurs a loss in a given year of assessment, that loss can be carried forward indefinitely to be set off against future profits from the same business.

More importantly, you can also elect to set off the loss against your other personal income (such as employment income or rental income) in the same year. This is a powerful feature known as "Personal Assessment," which can reduce your overall tax liability significantly during challenging years ².

4. Fewer compliance and administrative costs

Compared to a limited company, a sole proprietorship has fewer statutory compliance requirements. There is no need to file an annual return with the Companies Registry, hold annual general meetings, or undergo a statutory audit of financial statements (unless certain revenue thresholds are met). This translates to lower ongoing administrative and professional service costs.

Tax implications of a sole proprietorship in Hong Kong

Choosing a sole proprietorship as your business structure offers several tax benefits. However, it’s equally important to understand the tax implications and responsibilities that come with operating as a sole proprietor.

For example, you need to be aware of the basis period, which is the specific time frame the Inland Revenue Department (IRD) uses to assess income and calculate taxable profits for each assessment year. You must also ensure that your business complies with these tax obligations to maintain accurate reporting and full compliance.

Here are some of the key tax implications of running a sole proprietorship in Hong Kong.

1. Profits tax obligation

The primary tax obligation is the Profits Tax. Any person, including a sole proprietor, carrying on a trade, profession, or business in Hong Kong, is 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 ².

Your assessable profits are calculated by taking your total business income and subtracting all deductible expenses and allowances. Your net profits, after allowable deductions, form the basis for your profits tax liability. It's crucial to maintain meticulous records of all income and expenditure to ensure you can accurately calculate your profits and claim all eligible deductions.

2. Personal liability for tax debts

Stemming from the principle of unlimited liability, you're personally responsible for paying all the taxes owed by the business. The IRD can pursue your personal assets to recover any unpaid tax debts, penalties, or fines. This direct link between business tax and personal assets underscores the importance of diligent tax planning and compliance.

3. The principle of "Arising in or derived from Hong Kong"

Hong Kong operates on a territorial source principle of taxation. This means that only profits that have a source in Hong Kong are subject to Profits Tax. If your business earns profits from activities conducted outside of Hong Kong, those profits may be considered offshore and not be subject to Hong Kong tax.

However, determining the source of profits can be complex and is often a matter of fact. It's essential to maintain clear records that can substantiate any offshore claim, and seeking professional advice is highly recommended if you have international operations ¹⁰.

Step-by-step guide to filing tax returns

Filing your tax return correctly and on time is a fundamental responsibility. Here's a step-by-step guide for a sole proprietor in Hong Kong.

Step 1: Obtain a business registration certificate

Before you can file taxes, your business must be registered. You must apply for a Business Registration Certificate from the IRD’s Business Registration Office within one month of commencing business. This certificate must be displayed prominently at your place of business ^1,5.

Step 2: Receive your tax return form (BIR60)

The IRD will typically issue the Individual Tax Return (Form BIR60) to you on the first working day of May each year. This form is used to report your employment income, rental income, and profits from your sole proprietorship business ⁸.

Step 3: Maintain proper business records

Throughout the year, you must keep sufficient records of your income and expenditure. This is a statutory requirement. These records should allow your assessable profits to be readily ascertained. Essential documents include ¹¹:

• Bank statements for your business account.
• Sales invoices and receipts.
• Purchase invoices and expense receipts.
• A record of your assets and liabilities.
• Payroll records if you have employees. If you hire employees, you must register with the Labour Department and comply with relevant employment regulations. You're also required to withhold and pay salaries tax on employee wages as per Hong Kong law.

Note for employers: Hong Kong generally doesn't operate PAYE (withholding) for salaries tax. Employers must file IR56 series Employer’s Returns and meet MPF duties; employees settle salaries tax directly ^12,13,14,15.

Step 4: Prepare financial statements

From your records, you will need to prepare a Profit and Loss Account and a Balance Sheet for the relevant year of assessment. Even if you are not required to have them audited, these statements are necessary for completing your tax return.

Step 5: Calculate your assessable profits

Your assessable profits are not necessarily the same as your accounting profits. You must make certain tax adjustments. This involves ^2,16:

Starting with the accounting profit from your Profit and Loss Account.

Adding back non-deductible expenses. These include private expenses, capital expenditures (like buying a new computer, though depreciation allowances may be claimable), and certain provisions.

Subtracting non-taxable income (e.g., profits from the sale of capital assets) and any specific tax allowances, such as depreciation allowances on machinery and equipment.

Common Deductible Expenses:

• Rent for office or business premises
• Employee salaries, wages, and bonuses
• MPF contributions for employees
• Utility bills (electricity, water, internet)
• Business-related travel and entertainment expenses
• Professional fees (e.g., accounting, legal)
• Advertising and marketing costs

Step 6: Complete and submit the tax return

Fill in Part 5 of the BIR60 form with the details of your sole proprietorship business, including the assessable profits or adjusted losses. You must complete the profits tax return accurately to report your business income and claim deductions. You do not need to submit your financial statements or supporting documents with the return, but you must retain them for at least seven years as the IRD may request them for review.

The typical deadline for submission is one month from the date of issue of the return. You can submit the form by mail or electronically through the IRD’s eTAX portal ^8,11.

Step 7: Receive notice of assessment and pay tax

After the IRD has processed your return, it will issue a Notice of Assessment. This document will state your assessable profits and the amount of tax you need to pay. It is crucial to check this notice carefully for any discrepancies. Payment is usually due in 2 instalments, and the deadlines will be clearly stated on the notice ^17,18. 

Other applicable taxes for sole proprietorships in Hong Kong

Besides the profits tax, sole proprietors may encounter other types of taxes depending on their business activities.

Property tax

If your sole proprietorship owns real estate in Hong Kong and earns rental income from it, you will be subject to Property Tax ^19,20.

• Tax Rate: Property Tax is charged at a standard rate of 15% on the net assessable value of the property.
• Net Assessable Value (NAV): This is calculated as the total rental income less an irrecoverable rent allowance and a standard statutory allowance of 20% for repairs and outgoings.
• Exemption: If you've already included the rental income from the property in your Profits Tax computation for your sole proprietorship, you can apply for an exemption from Property Tax to avoid double taxation.

Stamp duty

Stamp Duty is a tax levied on certain legal documents, known as "instruments," related to specific transactions. For a sole proprietor, the most common instances where Stamp Duty is applicable are ^21,22:

• Lease of Immovable Property: When you rent an office, shop, or any other premises for your business, the tenancy agreement is subject to Stamp Duty. The rate varies depending on the term of the lease.
• Transfer of Hong Kong Stock: While less common for a typical sole proprietorship, if your business involves buying or selling Hong Kong stock, the contract notes for the transfer are subject to Stamp Duty.
• Transfer of Immovable Property: If the business buys or sells property in Hong Kong, Stamp Duty is payable on the agreement for sale and the conveyance on sale. The rates for property transactions can be significant.

It is a legal requirement to stamp the relevant documents within the prescribed time limit. Failure to do so can result in heavy penalties.

Tax payments: deadlines and methods

As a sole proprietor in Hong Kong, you're required to pay profits tax on your assessable profits each tax year. The tax year runs from April 1 to March 31, and you must file your tax return within 1 month of receiving the notification from the IRD. Timely filing and payment are essential to avoid penalties and interest charges.

You can pay profits tax using several convenient methods: online through the IRD’s eTAX portal, by phone, or in person at the Inland Revenue Centre. The IRD will issue a Notice of Assessment after processing your tax return, detailing the amount of tax due and the payment deadlines.

Sole proprietors can also claim various deductions and allowances on their tax return, such as approved charitable donations and deductions available to self-employed persons. Keeping accurate records of your business income, expenses, and donations throughout the year will help you maximise your deductions and ensure compliance. Remember, late payment of taxes can result in additional charges, so it’s important to pay on time and keep track of all deadlines related to your profits tax obligations ^8,17,18.

Simplify your finances with Aspire's Business Account

Sole proprietorship may be the ideal choice of business structure if you want to start a new venture. However, as your business grows, you may consider incorporating your company to make it easier to raise new funding or attract investors. At that stage, your financial operations will also become more complex, and without the right tools to manage them, you may find yourself spending more time on administrative tasks than on driving business growth.

This is where Aspire can help. Our Business Account is designed to streamline your financial operations, from managing invoices to making international payments. With Aspire, you can:

1. Track and monitor expenses in real time, ensuring your actual spend aligns with your budget.
2. Create and send invoices in just a few clicks, and monitor their status in a single dashboard for full visibility of current and upcoming cash inflows.
3. Save up to 50% of time on manual accounting tasks with smart automation.
4. Eliminate 100% of manual data entry through real-time syncing with Xero and QuickBooks.
5. Simplify cross-border payments and international transactions with detailed, upfront invoice documentation.