Profits tax

the profits tax in Hong Kong

In Hong Kong, profits tax is an income tax chargeable to business carried on in Hong Kong. Applying the territorial taxation concept, only profits sourced in Hong Kong are taxable in general. Capital gains are not taxable in Hong Kong, although it is always arguable whether an income is capital in nature. The persons chargeable to profits tax includes corporations, partnerships, trustees, and sole proprietors.

As a general rule, Hong Kong profits tax is levied on any persons who carries on a trade, profession or business in Hong Kong and assessable profits arising in or derived from Hong Kong for a year of assessment. The profits tax rate applied is 15% for individuals and 16.5% for corporations (a. k. a. the standard rate) on their net assessable profits for the year of assessment 2014/15.

The Approved charitable donations are limited to 35% (10% for years of assessment up to and including 2002/03; and 25% for years of assessment 2003/04 to 2007/08) of the adjusted assessable profits before deduction of donations, per section 16D of the IRO. Such aggregate must not be less than $100.

Types of plant and machinery that are tax depreciable and their respective rates (for annual allowance only, see below) are set out in a prescribed schedule. The definition of plant and machinery does not include any implement, utensil and article. Instead, they can be fully deductible for profits tax purpose on replacement basis (i. e. the initial purchase of which is not deductible)

For assets purchased during that year of assessment, an initial allowance of 60% will be granted. Thereafter, the assets sharing the same rates of annual allowance are transferred into a pool, classified by the prescribed schedule in the Rule 2 and annual allowance of either 10%, 20% or 30% will be granted for the entire pooled assets. For example, a motor vehicle, which is 30% pooled, can be first granted a 60% initial allowance and 30% of annual allowance on the remaining 40% asset value. Therefore, 72% (i. e. 60% + 30% x 40% = 72%) of the value of motor vehicle can be deducted from tax in the year of purchase.

Tax losses can be carried forward to set off the profits in the future years until fully absorbed but not backward. Group loss relief is not available in the taxation in Hong Kong. Taxpayer bears no rights to object a loss determined by IRD because loss is not an assessment in accordance to the definition of Ordinance. Until the time when profits are assessed which affects the tax loss (e. g. offsetting of previous tax loss), the taxpayer may apply for an objection to the CIR. It also implies that a statement of loss, which grants no objection option to the taxpayer, has a different status with the notice of assessment. An assessment cannot be re opened after being final and conclusive after 6 years (or 10 years in the case of willful tax evasion). On the contrary, a case of tax loss, even agreed by the CIR in previous year, can be re opened at any time in the future since it is technically not an assessment.