| The
Scope of the Charge |
| |
Persons, including corporations,
partnerships, trustees and bodies of persons carrying
on any trade, profession or business in Hong Kong are
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.
There is therefore no distinction made between residents
and non-residents. A resident may therefore derive profits
from abroad without suffering tax; conversely, a non-resident
may suffer tax on profits arising in Hong Kong. The question
of whether a business is carried on in Hong Kong and whether
profits are derived from Hong Kong is largely one of fact,
however some guidance on the principles applied can be
found in cases which have been considered by the Hong
Kong Courts and the Privy Council. No tax is levied on
profits arising abroad, even if they are remitted to Hong
Kong.
If a person sells his flat or any property as part of
a scheme of profit-making, it will be regarded as a business
and he is required to pay tax on any profit he may make. |
Top |
|
Special
Provisions for Ascertaining Liability to Profits Tax
Certain Amounts Deemed to be Trading Receipts
|
| |
The following sums are deemed to be receipts
arising in or derived from Hong Kong from a trade, profession
or business carried on in Hong Kong under the Inland Revenue
Ordinance (I.R.O.) :
(1) Sums received from the exhibition or use in Hong Kong
of cinematography or television film or tape, any sound
recording or any advertising materials connected with
such film, tape, or recording [Section 15(1) (a)].
(2) Sums received for the use or right to use in Hong
Kong a patent, design, trademark, copyright material or
secret process or formula or other of a similar nature
[Section 15(1) (b)].
(3) Sums received by or accrued to a person carrying on
business in Hong Kong by way of grant, subsidy or similar
financial assistance other than sums in connection with
capital expenditure [Section 15(1) (c)].
(4) Sums received by way of hire, rental or similar charges
for the use of movable property or the right to use movable
property in Hong Kong [Section 15(1) (d)].
Non-Residents and Agents Dealing with Non-Residents
(1) A non-resident is chargeable to tax either directly
or in the name of his agent in respect of all his profits
arising in or derived from Hong Kong, from any trade,
profession or business carried on there, whether or
not the agent has the receipt of the profits, and the
tax may be recovered out of the assets of the non-resident
or from the agent. The agent is required to retain from
the assets sufficient money to pay the tax.
(2) A non-resident who receives sums specified in Sections
15(1) (a) and (b), and a non-resident entertainer or
sportsman who receives sums from the performance in
Hong Kong of an activity in his character as entertainer
or sportsman is chargeable to tax in the name of the
person who paid or credited the sums to the non-resident.
The person who pays or credits such sum is required
at the time he makes the payment or credit to deduct
from those sums an amount sufficient to meet the tax
due.
(3) Resident consignees are required to furnish quarterly
returns to the Commissioner showing the gross proceeds
from sales on behalf of their non-resident consignors
and to pay to the Commissioner a sum equal to one per
cent of such proceeds, or such lesser sum as may have
been agreed with the Commissioner.
(4) Where a non-resident carried on business with a
resident and the business is so arranged that it produces
to the resident either no profits or less than the ordinary
profits that might be expected to arise to an independent
concern, the business may be treated as carried on in
Hong Kong by the non-resident through the resident as
his agent.
(5) Where the true profits of a non-resident from a
trade, profession or business carried on in Hong Kong
cannot be readily ascertained, they may be computed
on a fair percentage of the turnover in Hong Kong.
(6) Where the accounts of a non-resident whose head
office is outside Hong Kong do not disclose the true
profits of a Hong Kong permanent establishment, the
profit of the branch for tax purposes is taken to be
the amount which bears to the taxpayer's total profits
the same proportion as his turnover in Hong Kong bears
to his total turnover.
|
Top |
|
| Assessable
Profits |
| |
The Assessable Profits (or
Adjusted Loss) are the net profits (or loss) [other than
profits (or loss) arising from the sale of capital assets]
for the basis period, arising in or derived from Hong
Kong, calculated in accordance with the provisions of
Part IV of the I.R.O. |
Top |
|
| Basis
Period |
| |
The Basis period is either:
(1) the year ended 31 March during the relevant year;
(2) where the annual accounts are made up to any day other
than 31 March, the year ended on that day in the relevant
year;
(3) where the accounts are made up for each lunar year,
the lunar year ended in the relevant year;
(4) where you commenced or ceased to carry on a business
or changed its accounting date, the special period prescribed
by Sections 18C, 18D or 18E of the I.R.O.;
(5) for commencement case, if accounts for this period
have not been prepared the profits to be returned may
be calculated by apportioning the profits shown by the
accounts which cover the period; or
(6) for cessation/transfer of business case, special rules
apply:-
where the business does not cease but, in whole or in
part, is transferred to or carried on by another person;
in the case of cessation occurring on or after 1 April
1979 of a business which commenced before 1 April 1974. |
Top |
|
| Exemption |
| |
The following income and profits
are excluded from the assessable profits:-
- dividends received from a corporation which is subject
to Hong Kong Profits Tax;
- amounts already included in the assessable profits of
other persons chargeable to Profits Tax;
- interest on Tax Reserve Certificates;
- interest on, and any profit made in respect of a bond
issued under the Loans Ordinance (Cap. 61) or the Loans
(Government Bonds) Ordinance (Cap. 64), or in respect
of an Exchange Fund debt instrument or in respect of a
Hong Kong dollar-denominated multilateral agency debt
instrument; and
- sums received by or accrued to an authorized mutual
fund corporation or trustees of an authorized unit trust
by way of:-
- interest;
- gains or profits arising from the sale or other disposal
or on the redemption on maturity or presentment of securities;
and
- gains or profits under a foreign exchange contract or
futures contract. |
Top |
|
| Deductions |
| |
Deductible Expenses
Generally, all outgoings and expenses, to the extent
to which they have been incurred by the taxpayer in
the production of chargeable profits, are allowed as
deductions. Reference can be made to Section 16 of the
I.R.O.
A transfer of certain allowable head office administrative
expenses by means of a charge to a local branch or subsidiary
in Hong Kong would be allowed as a deduction for Hong
Kong tax purposes, to the extent to which they were
incurred during the basis period for the year of assessment
in the production of profits chargeable to tax.
Non-deductible Items
In computing the assessable profits deduction is specifically
prohibited in respect of the following:
-domestic or private expenses and any sums not expended
for the purpose of producing the profits;
-any loss or withdrawal of capital, the cost of improvements
and any expenditure of a capital nature;
-any sum recoverable under insurance or contract of
indemnity;
-rent of or expenses relating to premises not occupied
or used for
the purpose of producing the profits;
-taxes payable under the Inland Revenue Ordinance, except
Salaries Tax paid in respect of employees' remuneration;
-any remuneration or interest on capital or loans payable
to or, subject to section 16AA, contribution made to
a mandatory provident fund scheme in respect of the
proprietor or the proprietor's spouse or, in case of
a partnership, to its partners or their spouses.
Expenditure on Building Refurbishment
A person who incurs capital expenditure on the renovation
or refurbishment of business premises is allowed to
deduct that expenditure over a period of 5 years in
equal installments commencing in the year in which the
expenditure is made.
Expenditure on plant and machinery specially related
to manufacturing, and on computer hardware and software
Immediate write off in full is to be allowed.
Depreciation Allowances
(1) Industrial Building Allowances on Industrial Buildings
and Structures
-Initial allowance: 20% on the cost of construction
of the premises
-Annual allowance: 4% on the cost of construction of
the premises
-Balancing allowance or charge will be due upon disposal
of the premises
(2) Commercial Building Allowances on Commercial Buildings
and Structures
-Annual allowance: 4% on the cost of construction of
the premises
-Balancing allowance or charge will be due upon disposal
of the premises
(3) Plant and Machinery
-Initial allowance: 60% on the cost Annual allowance:
at rates of 10%, 20% or 30% as prescribed by the Board
of Inland Revenue in the Inland Revenue Rules, on the
reducing value of the asset. Items qualifying for the
same rate of annual allowance are grouped under one
"pool".
-A balancing allowance is available only on cessation
of a business to which there is no successor. A balancing
charge can, however, arise whenever the disposal proceeds
of one or more assets exceed the reducing value of the
whole "pool" of assets to which the disposed
items belong.
Donations
Charitable donations made to approved charitable institutions
or trusts of a public character or to the Government
of the Hong Kong Special Administrative Region, amounting
in aggregate not less than $100 but not exceeding 25%
(10% for years of assessment up to and including 2002/03)
of the assessable profits, are allowable for deduction
from the assessable profits.
|
Top |
|
| Specified
Rate of Interest for the Purposes of Section 16(2) (b)
of the Inland Revenue Ordinance |
| |
|
| |
Top |
|
| Special
Provisions Applicable to Certain Trades and Businesses |
| |
The followings are special
provisions made in the I.R.O. for ascertaining assessable
profits of some particular trades and businesses:
| Relevant Section in I.R.O.
|
Trades / Businesses |
| S.23 |
Life insurance companies |
| S.23A |
Insurance companies other than life insurance
companies |
| S.23AA |
Mutual insurance corporations |
| S.23B |
Ship-owners |
| S.23C |
Resident aircraft-owners |
| S.23D |
Non-resident aircraft-owners |
| S.24 |
Clubs and trade associations |
|
Top |
|
| Charge
of Profits Tax on Qualifying Debt Instruments |
| |
A taxpayer will be charged
to tax at a concessionary rate, being 50% of the normal
profits tax rate, on his trading profits and interest
income derived from certain debt instruments issued in
Hong Kong. To qualify for the concession, the debt instrument
has to be lodged with and cleared with the Central Moneymarket
Unit operated by the Hong Kong Monetary Authority (HKMA);
have a rating acceptable to the HKMA from a credit rating
agency recognised by the HKMA; have an original maturity
of not less than five years; have, where it is issued
before 1 April 1999, a minimum denomination of $500,000
or its equivalent in a foreign currency; or where it is
issued on or after 1 April 1999, a minimum denomination
of $50,000 or its equivalent in a foreign currency; and
be issued to the public in Hong Kong.
The Financial Secretary may exempt by order in the Gazette
an issuer from the $500,000 minimum denomination or the
credit rating requirement. |
Top |
|
| Treatment
of Losses |
| |
Losses made in an accounting
year are to be carried forward and set off against future
profits of that trade but a corporation carrying on more
than one trade may have losses in one trade offset against
profits of the other. For gains or losses which are subject
to concessionary tax rate, there are special provisions
on the adjustment of losses between concessionary trading
activities and normal trading activities. An individual
who incurs a trading loss and who claims Personal Assessment
will have the loss allowed as a deduction from his total
income. |
Top |
|
| Profits
Tax Rate |
| |
(1) Normal rate (for the year
of assessment 2003/04)
Corporations: 17.5%
Unincorporated Businesses: 15.5%
For the tax rates for the latest 7 years, please click
here. (2) Concessionary rate
A tax rate at 50% of the normal profits tax rate will
be applied to trading profits and interest income received
or derived from qualifying debt instruments issued in
Hong Kong, and to offshore business of professional
reinsurance companies.
All taxpayers are subject to the same corporation or
unincorporated business tax rate irrespective of their
residential status.
However, any permanent or temporary resident of Hong
Kong except a person under the age of 18 (unless both
his parents have passed and income by electing to be
assessed under Personal Assessment. An election may
offer relief where the tax computed under Personal Assessment
is less than the aggregate amount of the tax charged
separately under Profits Tax, Salaries Tax and Property
Tax. |
Top |
|
| Provisional
Profits Tax |
| |
Profits Tax is chargeable on
the actual profits of the year. As the profits for any
particular year cannot be known until after the year end,
a provisional tax charge is raised during the course of
the year. In the following year, when the profits of the
previous year are ascertained an assessment is made and
credit given for the provisional tax paid. |
Top |
|
| Anti-Avoidance
Provisions |
| |
(1) Section 61 of the I.R.O.
tackles any transaction which reduces or would reduce
the amount of tax payable by any person where the Assessor
is of the opinion that the transaction is artificial or
fictitious or that any disposition is not in fact given
effect to. When it applies the Assessor may disregard
any such transaction or disposition and the person concerned
shall be assessable accordingly.
(2) Section 61A of the I.R.O. applies to any transaction
entered into after 13 March 1986 for the sole or dominant
purpose of enabling a person to obtain a tax benefit.
Where it applies the Section provides for an assessment
to be made as if the transaction had not been entered
into or carried out or in such other manner as the Assistant
Commissioner considers appropriate to counteract the tax
benefit which would otherwise be obtained.
(3) Section 61B of the I.R.O. gives effect to a policy
of restricting the trafficking in loss companies for the
purpose of tax avoidance. The Section is aimed at the
situation where companies with accumulated tax losses
are sold for their losses to the proprietors of businesses
which are trading profitably. Once ownership of the loss
company has changed hand the profitable business is introduced
into the company and the losses brought forward are set
off against profits derived. The Section restricts this
avoidance practice by allowing the Commissioner to refuse
to set off losses brought forward where he is satisfied
that the sole or dominant purpose of a change in shareholding
is the utilisation of those losses to obtain a tax benefit. |
Top |
|
| Double
Taxation Relief |
| |
Hong Kong has reached an understanding
with the relevant tax authorities in the Central People's
Government for avoidance of double taxation between the
Mainland and Hong Kong. The arrangement covers airline
and shipping operations as well as other business activities.
In addition, we have concluded double taxation relief
arrangements in shipping and airline income with other
countries. For details, please click here. |
Top |
|
| Advance
Rulings |
| |
A person may apply to the Commissioner,
subject to payments and certain regulations, for a ruling
on how any provision of the Inland Revenue Ordinance applies
to him or the arrangement specified in the application.
For details, please click here. |
Top |
|
| Exemption
from Payment of Profits Tax |
| |
Interest (accrued on or after
22 June 1998) derived from any deposit placed in Hong
Kong with an authorized institution is exempt from payment
of Profits Tax. This exemption, however, does not apply
to interest received by or accrued to a financial institution. |
Top |
|
| A
Simple Guide on The Territorial Source Principle of Taxation |
| |
|
Top |
|
| Enquiries |
| |
Written enquiries relating
to Profits Tax may be sent to us by post at GPO Box 132
or via e-mail at taxpf@ird.gov.hk .For enquiries via electronic
media, please also refer to our web page on Submission
of Electronic Information for details on the prescribed
format, manner and procedures of filing electronic documents.
|
Top |
Hong Hong Inland Revenue Department Last revision date: 19 January
2004 |
|
