1. What is the profit tax rate in Hong Kong?
2. Is Audit Report a must to submit to Inland Revenue together with Profit Tax Return?
3. Why auditable accounts are required for limited company?
4. Are there any tax returns for sole proprietorship or partnership?
5. Does audit report is required for sole proprietorship or partnership?
6. Are all expenses of the Company’s owners are tax deductible?
7. What to do when Profit Tax Return and Employer’s Return are received?
8. Do I need to file Profits Tax Return if my company has no business during the year?
9. What’s the consequence of late filing of tax returns?
10. If I received a salaries tax/ profits tax/ property tax assessment, and found that the income assessed and the tax charged are too high, can i raise objection against this?
11. When a company shall start the audit of management accounts?
12. What to prepare before the Company goes for audit of management accounts
- What is the profit tax rate in Hong Kong?
Hong Kong taxes profits that arise in or are derived from a trade, profession or business carried on in Hong Kong i.e. on a territorial basis. The standard profits tax rate is 16.5%, although a reduced tax rate of 8.25% applies to the first HKD 2,000,000 in profits. Capital gains derived from the sale of securities and dividend income are generally exempt from taxation.
- Is Audit Report a must to submit to Inland Revenue together with Profit Tax Return?
The first profit tax return will be issued to a company in 18 months after the incorporation. It must be completed and submitted to the Inland Revenue Department within 3 months from the date of issue.
There are several supporting documents to be submitted together with the profit tax return including auditor’s report, therefore a Hong Kong Company must appoint an auditor.
- Why auditable accounts are required for limited company?
Before auditing of financial statements can be performed, a company must prepare auditable accounts and keep proper books of accounts in accordance with the Companies Ordinance: –
(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place;
(b) all sales and purchases of goods by the company;
(c) the assets and liabilities of the company.
Therefore it is necessary to employ suitable staff or to outsource those duties to an accounting company for enable proper preparation of auditable ledger books, accounts, financial statements and relevant documents.
- Are there any tax returns for sole proprietorship or partnership?
Profits Tax Return – Persons Other Than Corporations (BIR52) will be issued to partnership. For sole proprietorship, proprietor should report the profits / loss of all his sole proprietorship businesses in Part 5 of his Tax Return – Individuals (BIR60).
Sole proprietorship
Sole proprietorship shall apply for a Business Registration Certificate, any individual may carry on business as a sole proprietor. He has full control and liabilities over the business. If the business is successful, he can enjoy the benefit solely. Likewise, if the business fails, he will assume sole liability. Bank account and signboard can be printed in the name of the proprietorship. The sole proprietor should report the profits / loss of all his sole proprietorship businesses in Tax Return – Individuals (BIR60) which is usually issued in May of each year. It must be completed and submitted within 3 months from the date of issue.
Partnership
The first tax return (BIR52) will be issued to a partnership in 18 months after registration. It must be completed and submitted to the Inland Revenue Department within 3 months from the date of issue.
- Does audit report is required for sole proprietorship or partnership?
Audit is not required by the Inland Revenue Department for a sole proprietorship or partnership. It is however, requires you to keep sufficient records (in English or Chinese) to enable your assessable profits to be readily ascertained. All records must be retained for seven years from the transaction date. It is an offence not to keep adequate records.
- Are all expenses of the Company’s owners are tax deductible?
In general, only expenses incurred for generating business income are tax deductible. There is a common misconception among Hong Kong company owners that all expenses including personal and partly business related are tax deductible. For example, a company only carrying online sales of cosmetic and skin care products shall not claiming lots of expenses for entertaining customers. Also, a director of the company takes a trip overseas for business purpose but happens to meet up with a friend. The director needs to determine which expenses were incurred in the course of performing work as a reasonable amount. There is a benchmark for evaluating the reasonable amount of expense for a company to deduct in the context of their business operations and nature of expenses.
What’s more, it is necessary for a company to provide proper explanations and supporting proof for the expenses linked to the business operations.
General guidance
Tax Deductible
．Expenses related to borrowing money
．Rent paid for occupying buildings or land
．Foreign taxes paid on income subject to foreign tax
．Bad debts that have been written off
．Expenses for repair, refurbishment, and replacement of machinery, equipment, and premises
．Trademark and patent registration costs
．Retirement scheme contributions (subject to certain limitations)
．Research and development expenses
．Technical education fees
．Approved charitable donations
．Expenses for purchase of patents, registration of trademarks, copyrights, and registration of designs
．Capital expenditure on prescribed fixed assets (subject to limitations) and environmental protection machinery
Not Tax Deductible
．Domestic or private expenses and any expenses not related to profit generating
．Cost of improving property or assets
．Sums that can be recovered under insurance or contract of indemnity
．Any tax payable other than employees’ salaries tax
．Payments made to or for the benefit of spouses or partners
．Expenses related to property that is not occupied for profit-generating purposes
7. What to do when Profit Tax Return and Employer’s Return are received?
Profits Tax Return and the Employers Tax Return are two different returns issued by the Inland Revenue Department. Profits Tax Return is reporting taxable profits of a Hong Kong company during the relevant financial year, whereas the Employers Tax Return is for reporting any payments a company has made to directors and/or employees.
The first Profits Tax Return will be issued in 18 months since formation of your company, it allows longer time (three months) to submit the first Profit Tax Return from the date of issue. Subsequently you will only be given one month to do the filing every year. Although, you can request for an extension which will depend on the financial year end date of your company accounts.
For a limited company where business has already commenced, it is necessary to appoint a CPA to assist on preparing audited accounts which will be presented to the IRD together with the Profits Tax Return for filing.
8. Do I need to file Profits Tax Return if my company has no business during the year?
It is quite common to hear a misconception that you don’t need to file the Profits Tax Return if your company is not operating or not yet commenced business and neither do your company needs to file the Employer’s Return if there is no employees. In both cases, you are definitely still required to file a ‘Nil’ return.
9. What’s the consequence of late filing of tax returns?
Every tax return states clearly that such return shall be filed within a prescribed period of time, there are penalties for late filing of tax returns. Yet the IRD is fair enough that reminders are given to your company or tax representative prior to sending penalty notices. Act now and don’t wait until you receive the penalty notice!
If you have a good reason for not having filed the return on time, you can write to the IRD and apply for a waiver of the penalty.
10. If i received a salaries tax/ profits tax/ property tax assessment, and found that the income assessed and the tax charged are too high, can i raise objection against this?
Yes. You must lodge a written notice of objection with the Inland Revenue Department within one month after the date of issue of the assessment, stating the grounds for your objection clearly.
If the income was estimated or you do not get the full entitlement to allowances, you should find out if the assessment was an estimated assessment raised under section 59(3) of the Inland Revenue Ordinance. If it is, you must submit a completed tax return together with your objection letter.
Pending the ultimate settlement of the objection, you should pay as indicated on the demand note, or follow the Assessor’s advice regarding how much tax you should pay (whether you have to pay the full tax or, are allowed to pay a lesser amount of tax in the first instance). The Commissioner of the IRD may impose a surcharge on any tax not settled by the due date.
If you are still not satisfied with the determination of the Commissioner of the IRD, you may further lodge an appeal against the determination with the Board of Review (Inland Revenue Ordinance) which is an independent tribunal. Your appeal should be made in writing to the Clerk to the Board of Review (Inland Revenue Ordinance)within one month of the date of the Commissioner’s written determination.
11. When a company shall start the audit of management accounts?
A limited company in Hong Kong is required to have an annual audit to be carried out by a licensed Certified Public Accountant (CPA). A company’s management accounts must be presented to their appointed CPA for review and examination to prepare the audit report. The Company shall approach the auditor once they have received the Profit Tax Return, the audit may take 1 – 3 months to complete. Once the audit report has been approved and signed by the directors and auditors, the Profit Tax Return shall be submitted to the Inland Revenue Department together with the audit report.
12. What to prepare before the Company goes for audit of management accounts?
The company shall keep its operating and financial records properly, including bank statements, invoices, vouchers, receipts, etc. Such records shall be gathered throughout the financial year and kept in an orderly fashion so that management accounts (consist of Profit & Loss Account, Balance Sheet and General Ledger) can be prepared for audit purposes in a timely manner.
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