Hong Kong adopts a two-tiered profits tax rates regime. 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 arising in or derived from Hong Kong from such trade, profession or business. Hence, there is no distinction made between residents and non-residents. Moreover, generally, no tax is levied on profits arising abroad, even if they are remitted to Hong Kong.

Under the Inland Revenue Ordinance, a person is chargeable to profits tax under the following conditions:-

• he carries on a trade, profession or business in Hong Kong;
• the trade, profession or business derives profits; and
• the profits arise in or are derived from Hong Kong.

Whether profits arise in or are derived from Hong Kong may depend on the:

1. Nature of the profits and of the transactions which give rise to such profits.
2. The geographical location of the operations which produced such profits; of where the decision was made.
   1. The focus is on the geographical location of the taxpayer’s transactions as independent from previous or incidental transactions.
3. Business presence overseas: In the majority of the cases, where the principal place of business is located in Hong Kong and there is no business presence overseas, profits earned by that business are likely to be chargeable to profits tax in Hong Kong.

Profits Tax Assessment

The Assessable Profits (or Adjustable 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 Inland Revenue Ordinance. 

The profits tax rate for the first $2 million of assessable profits is 8.25% for corporations and 7.5% for unincorporated businesses. Assessable profits above $2 million are subject to the rate of 16.5% for corporations and a standard rate of 15% for unincorporated businesses. 

A concessionary rate at 50% of the normal profits tax rate is applicable to:

• trading profits and interest income received or derived from “short/medium-term debt instruments”;
• profits of the offshore business of professional reinsurer, or authorized captive insurer; and
• qualifying profits of a qualifying corporate treasury centre, aircraft lesser, or aircraft leasing manager.

Exemptions and Deductions from Profits Tax

The following sums are excluded from assessable profits:-

1. Dividends received from a corporation;
2. Amounts already included in the assessable profits of other persons chargeable to profits tax;
3. Interest on Tax Reserve Certificates;
4. Interest on, and any profit made in respect of a bond or in respect of an Exchange Fund debt instrument or in respect of a Hong Kong dollar-denominated multilateral agency debt instrument;
5. Interest income and trading profits derived from long term debt instruments;
6. Interest, profits or gains from qualifying debt instruments (issued on or after 1 April 2018); and
7. Sums received or accrued in respect of a specified investment scheme by or to the person in respect of a mutual fund, unit trust or similar investment scheme that is authorized as a collective investment scheme, or where the Commissioner is satisfied that the above is bona fide widely held investment scheme according to applicable regulatory regime.

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. Prohibited deductions include, for example, domestic or private expenses and any sums not expended for the purpose of producing the profits; and any sum recoverable under insurance or contract of indemnity. 

Key Takeaways

• Regardless of residential status, profits arising in or derived from business conducted in Hong Kong are subject to profits tax in Hong Kong.
• Chargeability of profits tax depends on several territorial and transactional factors and some exceptions.

References:

1. Profits tax: https://www.ird.gov.hk/eng/tax/bus_cpt.htm