Overview of Hong Kong Profits Tax
Hong Kong operates one of the most straightforward and competitive tax regimes in the world. Profits tax is levied on assessable profits arising from a trade, profession, or business carried on in Hong Kong. Only profits that arise in or are derived from Hong Kong are subject to profits tax.
For the 2024/25 year of assessment, the standard profits tax rates are: Corporations: 16.5% (8.25% on first HK$2 million under the two-tier system); Unincorporated businesses: 15% (7.5% on first HK$2 million).
The Two-Tier Profits Tax System
Introduced in the 2018/19 year of assessment, the two-tier system reduces the tax burden for smaller profitable entities. Only one entity within a group of connected entities may benefit from the reduced rate.
Territorial Source Principle
Determining the source of profits is a recurring area of dispute. The courts have held that the proper approach is to identify the operations that gave rise to the profits and ascertain where those operations were performed. Key factors include where contracts were negotiated and executed, where services were physically performed, and where goods were purchased and sold.
Case Study: Offshore Profits Claim
A Hong Kong trading company engaged in purchasing electronic components from Shenzhen suppliers and selling to European buyers sought advice on the taxability of its profits. All purchase negotiations and supplier visits were conducted in the Mainland. After reviewing documentation, Aaron Wong & Co. assisted in filing an offshore claim with the IRD. The claim was accepted, resulting in a significant reduction in profits tax liability.
Deductible Expenses
Section 16 of the Inland Revenue Ordinance allows deductions for outgoings and expenses incurred in the production of assessable profits, including: cost of goods sold, staff salaries and MPF contributions, rent and rates, professional fees, depreciation allowances, and interest on loans.
Profits Tax Return Filing
The IRD issues Profits Tax Returns annually, typically in April. Aaron Wong & Co. manages the complete tax compliance cycle — from preparing the tax computation to filing the return and handling IRD queries.