Introduction
In our previous article on Hong Kong Audit Report – Audit Process ＆ How To Be Prepared (Checklist Included), we touched upon frequently asked questions concerning the Hong Kong audit, corporate tax, and its process.
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 can still be pretty complicated. In cases where you accidentally engage in non-compliance, you may even be subjected to financial penalties! This article will take a closer look at what business owners need to consider to prepare for their annual audit in Hong Kong, and the Profits Tax Return (PTR) filing process.
| TLDR: There is a two-tiered profit tax regime for corporations in Hong Kong. First HK$2,000,000 profits will be charged on 8.25%, and the remaining will be charged on 16.5%. Your company’s first profit tax return form will be issued 18 months after your incorporation. Thereafter, it will be issued on the first working day of April every year. Late submission will be penalized. Profit Tax return form, audit report, and a list of company-related documents are required for submission to the Inland Revenue Department Hong Kong. |
What you will learn from this article:
Profit Tax Return
1. What is Profit Tax Return in Hong Kong?
3. How Do I Complete and File My Profits Tax Return?
4. What are the tax reporting obligations for a dormant company in Hong Kong?
5. What is the Financial Cut-Off Date for Businesses in Hong Kong?
6. Is there any profit tax deduction for companies in Hong Kong?
Profit Tax Return Deadline
7. When is the Profits Tax Return Deadline?
8. What happens if I miss the deadline for Profit Tax Return submission?
9. Can I extend the Profits Tax deadline submission?
10. Can I change the year-end date for my company?
12. As an offshore company, do I need to submit a Profits Tax Return?
13. Applying for Profit Tax Exemption Annually
Tips and Checklist
14. Final Four Tips to Better Prepare for the Filing of Tax Return Form Annually
15. Why Should You Use FastLane Services?
Profit Tax Return
What is a Profit Tax Return in Hong Kong?
Hong Kong Profits Tax is levied on all profits arising from, or are derived in Hong Kong. It 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 employees), will be liable to Profits Tax.
The Hong Kong Inland Revenue Department (HKIRD/IRD) introduced a two-tiered profit tax rate regime on December 29, 2017. 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.
The corporate tax base in Hong Kong for the first HK$2,000,000 of assessable profits will be 8.25%, and the remaining profits will be taxed at the existing 16.5% tax rate.
Types of Profit Tax Return Form
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 Return
- Small corporations and dormant companies must continue to prepare their audited financial statements and tax computation before completion and submission of BIR51
Profits Tax Return – Persons Other Than Corporations (BIR52)
- Applicable to corporations that 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
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, a 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 are in Hong Kong
How Do I Complete and File My Profits Tax Return?
When completing and filing 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 enough for businesses to complete their corporate 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. (A tax representative is a person or a company who is authorised according to law to help taxpayers to manage activities regarding the fulfilment of tax liabilities. They can help companies to prepare tax filing, communicate with IRD, as well as formulate tax strategies for increasing tax efficiency.)
Supplementary Forms
When completing and submitting a profits tax return, oftentimes a supplementary form is required to support a taxpayer’s claim of a preferential regime and tax incentive. Supplementary forms are not provided by the tax department but can be downloaded from their website.
What are the tax reporting obligations for a dormant company in Hong Kong?
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 that 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.
Relevant blog: How to handle a Hong Kong dormant company?
Despite their status, dormant companies must adhere to their Hong Kong tax obligations and file tax returns when required to do so by the tax department. 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.
In order to officially qualify as a dormant company, a dormancy commencement application must be submitted and approved by the Hong Kong companies registry.
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.
.What is the Financial Cut-Off Date for Businesses in Hong Kong?
The most popular financial cut-off date for most Hong Kong companies is either December 31st or March 31st. However, unlike many countries in the world where every company has the same financial year-end date of 31 December, Hong Kong companies are free to choose any month-end date of their choice.
Check out and see if you are choosing the right Financial year-end date.
Is there any profit tax deduction for companies in Hong Kong?
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 authorized financial institutions) can be exempted from tax, other expenses 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:
- Rent paid on business premises for business premises
- Light, water, and telephone charges for business premises
- Employer’s mandatory and voluntary contributions to MPF schemes (Deduction limited to 15% of the total emoluments)
- MPF mandatory contributions if self-employed (applicable to the sole proprietor or partner)
- Severance or long service payments at the termination of employment
- Bad or doubtful debts
- Repairing costs for premises, machinery, and plants used in producing profits
- Replacement costs of implements and utensils used in producing profits
- Donations to approved charities valuing no less than $100 but not exceeding 35% of the adjusted assessable profits.
The second part of the profit tax deduction comes from the government. In Hong Kong’s yearly financial budget, the authorities may announce some tax deduction policy based on social environment or specific needs. For instance, there is a one-off reduction of profit tax for the year of assessment 2020/21 by 100%, subject to a ceiling of $10,000 per case.
Profits Tax Return Deadline
When is the Profits Tax Return Deadline?
If you have recently formed a company in Hong Kong, you will receive your first Profit Tax Return (PTR) 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 Inland Revenue Department within 3 months from the day of the issue.
Thereafter, your Corporate 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.
Thereafter, your Corporate 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.
If the company made a loss in its first year of operation, the IRD will give a break and may not send the PTR in the coming year. Even though the profit tax return is not sent, you are obligated to keep all financial documents for each financial period, and prepare the audit report annually. Companies are required to report to IRD if the loss making situation changes. Below is the sample letter from IRD for cases like this:
The due date for Profits Tax Return depends on the financial year-end date. Any date can be chosen as the fiscal year-end date for Hong Kong limited companies or unincorporated businesses. Most companies in Hong Kong set their financial year-end date for December 31st or March 31st.
If a financial year-end date of December 31st is selected, a Profit Tax Return must be filed by mid-August the following year. For companies that set the financial year-end date for March 31st, the Profits Tax submission deadline will be around mid-November in the same year. If you choose neither of the above dates, the tax department will send you the Corporate Tax Return form on the first working day of April, which will be due for submission 1 month from the issue date of the form.
What happens if I miss the deadline for Profit Tax Return submission?
Late submission in Profits tax return may be subject to penalties ranging from HK$1,200 to HK$10,000. You are also subject to prosecution. To avoid delay in Corporate Tax Return filing, it is recommended to have all the financial documents ready for your CPA because the document preparation process is usually the longest step in the audit process.
.Can I extend the Profits Tax deadline submission?
Yes, a further 2-weeks extension will be granted to Small Corporations and Small Partnership Businesses on application, if they file the Profit Tax Return through the online platform. Besides, the tax representative can request for extension only if the company has a reasonable reason for the delay in submission. IRD would not entertain extension requests without reasonable reason (e.g. absent from HK, sickness).
Can I change the year-end date for my company?
Yes, you can change the year-end date. However, please note that the financial year cannot be longer than 18 months. It is not allowed to extend the financial year-end date again within five years from your previous year-end extension.
Do I still need to audit my accounts and submit a Profits Tax Return if I am not making profits or the business has not yet started?
In the case that your business has yet to commence, you are allowed to report that it has “not yet commenced” to the Inland Revenue Department in Hong Kong. The company director or company secretary must provide a declaration of a not yet commenced business. You can file a “NIL” Profits Tax Return to the IRD in absence of an audit report.
However, please note that you are still required to prepare an audited financial statement even when the business has not yet started. Once your business commences, you are required to submit your first and subsequent years’ financial statements.
As an offshore company, do I need to submit a Profits Tax Return?
First of all, we need to see if your business qualifies for offshore tax exemption. Here are some checklist that would qualify your business for an offshore profit tax exemption:
- All your business income is generated outside of Hong Kong;
- You have no customers (people or business) or suppliers for your business in Hong Kong;
- Your business (including your employees) is operating outside of Hong Kong;
- Your service and products are not available in Hong Kong;
- The day-to-day business decisions and service agreements are signed outside of Hong Kong.
More information can be found on IRD’s official website.
Answer to the question:
You can claim an offshore status for your Hong Kong company If you fulfill all the requirements set by the Inland Revenue department.
An offshore tax exemption claim can be submitted along with the company’s audit report after the company’s financial period.
Bear in mind that submitting the tax exemption request is not the end of the process. You should be ready to prove that the profit generated during the period was derived outside of Hong Kong. The process involves replying to questions raised by the Inland Revenue officers and providing supporting documents to support your claims including business incorporation information, personal information and location of all company directors, company invoices, and other relevant documents.
The offshore claim status will stay effective in the course of 3 years.
Applying for Profit Tax Exemption Annually
Even with an offshore company status, a yearly audit on your accounts is still required and you will still need to submit the statutory documents with the profit tax return (PTR) to IRD. However, after the approval of your company’s offshore status, your auditor will take this into account when undergoing and preparing the audit report.
When submitting your corporate tax return, you need to submit a certified copy of the Financial Statement along with the Profit and Loss Account, the tax computation, and the offshore tax exemption application.
To examine your offshore claim, the IRD may review your transactions to investigate whether the offshore claim is valid. Therefore, it is recommended to keep your complete transaction records, your service agreements, your meeting summaries, travel receipts, purchasing receipts, shipping documents, and other business-related documentation ready.
.Final Four Tips to Better Prepare for the Filing of Tax Return Form Annually
Do not wait to perform accounting reconciliations
Reconciliation is vital in business accounting, as reconciled accounts help prevent errors in financial statements. Because reconciliations also help ensure that financial reports are properly presented, take time to ensure that they have been completed without error.
Perhaps most importantly, ensure that your accounting treatments are reconciled to your trial balances. Ensure that you are able to present related documentation to your auditors to help provide context for any account that looks remotely suspicious.
You can never start preparing for your audit and corporate tax filing too early, given that the audit process is the last place you would like to discover a mistake in your financial statements!
Prepare your documents before the audit
Before conducting an audit and preparing the profit tax return, auditors will ask you to provide a varying list of documents/information they require for inspection. Given that the process is often hectic and stressful for all parties involved, and that auditors will most often ask additional questions, there is no such thing as too much preparation.
To help facilitate the audit process, it is recommended to gather all requested documents/information before the audit begins. This way, your auditors can minimize the time spent conducting their tasks and will have a window of time to ask additional questions if needed. To the extent that your auditors are engaged on a time-cost basis, adequate preparation can lower your estimated audit and corporate tax filing costs.
Prepare your trial balances beforehand
Trial balances list all of a company’s general ledger accounts (both revenue and capital). Trial balances will be prepared periodically by a company to help ensure a company’s bookkeeping entries are accurate. Given their purpose, trial balances are frequently requested by auditors during an audit.
To ensure a successful tax filing, companies should take steps to routinely prepare trial balances. In the event that your trial balances do not reconcile with your financial statements, additional time and resources will be required during this time-sensitive process to rectify any errors identified.
Use cloud accounting software
Cloud accounting software, like Xero, offer their users simple yet powerful ways to manage their finances. Dedicated accounting software allows greater management of every facet of a business, from bookkeeping to invoicing. Consistent use of such software will ensure that the information presented to your auditors is of the highest quality.
In addition, perhaps one of the more appealing attributes of cloud accounting software is the added convenience of being able to share your information with your advisors. To facilitate the sharing of information, cloud accounting software like Xero allows multiple parties to view and import information as they require. Cloud accounting software thus decreases the amount of time necessary to conduct an audit and profit tax filing.
Why Should You Use FastLane Services?
Completing tax returns can be an exhausting process for companies and individual taxpayers alike. Everyone is concerned about making mistakes, especially when it can be so costly!
The FastLane Group has extensive experience helping hundreds of companies operating in Hong Kong with their audit and taxation needs. With significant years of experience helping SMEs, FastLane has developed a unique understanding of the needs of companies operating in Hong Kong.
Furthermore, because FastLane is a licensed Hong Kong CPA firm we can act as a one-stop solution for all your business needs. As our accounting team can work closely with our company secretary department, you won’t need to worry about coordinating between different groups when it comes time to conduct your audit. Whether you need help preparing to complete your profits tax returns or even communicating with the IRD, our team of qualified professionals would be delighted to assist. Contact us today!
Checklist for Filing Profit Tax Return in Hong Kong
We understand it may be complicated to manage profit tax, feel free to check out our comprehensive Profit Tax Return Filing Checklist as your guide in the journey of preparing tax filing.
- Profits Tax Return Forms
- Profits Tax Return – Corporations (BIR51)
- Profits Tax Return – Persons Other Than Corporations (BIR52)
- Profits Tax Return – In Respect Of Non-Resident Persons (BIR54)
- Audit Report
- A certified copy of the Statement of Financial Position / Balance Sheet
- Profit & Loss Accounts
- Tax computation
- Audited financial statements of subsidiary companies
- Copy of original Profit Tax Return from the IRD
- All financial statements
- All sales/service agreements, employment contract, tenancy agreement
- All purchase invoice
- Receipt for all expenses
- Bank statements (The auditor might ask you to sign a confirmation form which will be sent to the bank to obtain the bank balance)
- All sales invoices with the corresponding receipt
- Copy of any special license like SFC License and Property Agent License (if any)
- Copy of company registration documents:
- Updated business registration certificate
- Incorporation certificate
- Articles of association
- Annual Return
Final Thoughts
We hope this guide allows you to understand more about corporate tax returns. Although the tax system in Hong Kong is relatively simple, there are many subtle details business owners can pay attention to avoid unnecessary tax payments. Feel free to download a copy of our ebook about Hong Kong taxation for your reference when you encounter something you want to clarify.
