Understanding accounting and tax in Hong Kong

Once your Hong Kong business is registered, you will need to manage various tax obligations, such as the profits tax and withholding tax, while adhering to comprehensive financial reporting standards.

Profits tax in Hong Kong

Hong Kong’s corporate tax system, or profits tax as it is commonly referred to, follows a territorial and flat-rate principle. In other words, tax will be levied only on profits arising in or derived from carrying on a trade, business, or profession in Hong Kong. It is not applicable to profits derived from sources outside of Hong Kong.

Hence, if you operate a business in Hong Kong but your profits are derived from elsewhere, you are not liable to pay profits tax. This is irrespective of whether the profits have been remitted to Hong Kong. The territorial principle does not distinguish between residents and non-residents.

It is also important to note that Hong Kong's new Foreign-Sourced Income Exemption (FSIE) regime, effective from 1 January 2024, introduces significant changes aimed at expanding the scope of foreign-sourced income that can qualify for exemption from profits tax.

The FSIE regime currently covers foreign-sourced interest, dividends, intellectual property (IP) income, and gains from the disposal of equity interests and other types of assets, including both movable and immovable property.

To qualify for these exemptions, entities must meet economic substance requirements. Details can be found on Hong Kong’s Inland Revenue Department website.

These changes align Hong Kong's tax policies with international standards, particularly those set by the European Union, and aim to prevent cross-border tax avoidance.

Profits tax rates

In Hong Kong, corporations have two options for profits tax rates:

Single tier: Corporations are taxed at 16.5% on assessable profits and unincorporated businesses are taxed at 15%
Two-tier: The tax rate for the first HK$2 million of assessable profits is lowered for corporations and unincorporated businesses

The two-tier profits tax rate aims to reduce the tax burden of most taxpaying small and medium-sized enterprises (SMEs). For corporations, the first HK$2 million of profits will be taxed at 8.25% and the remaining profits will continue to be taxed at the existing 16.5% tax rate.

For unincorporated businesses, the first HK$2 million of profits will be taxed at 7.5% and the remaining profits will be taxed at the existing 15% tax rate.

Take note that if you are part of a group of connected entities, only one entity can enjoy the two-tier rates. For this purpose, you will need to identify which entity will benefit and to make election accordingly.

Basis period

Profits income tax in Hong Kong is assessed in relation to a Year of Assessment (YA). For example, a YA may commence on 1 April 2023 and end on 31 March 2024, and would be referred to as YA 2023-24.

Filing due date

The Inland Revenue Department (IRD) of Hong Kong generally issues the profits tax returns on the first working day of April every year. The standard filing deadline is one month from the date the tax returns are issued. However, corporations can get an extension for filing their returns at a later date, provided that certain conditions are met.

To encourage electronic filing, an extra month extension can also be granted upon application. The deadline can thus be extended as the following:

Normal issue date	For accounting year ended between	Extended due date	Extended due date for electronic filing
First working day in April of the following year of assessment	1 April to 30 November	2 May (no extension)	2 June
	1 December to 31 December	15 August	15 September
	1 January to 31 March	15 November	15 December

If you are a newly registered business, the IRD will issue the profits tax return 18 months after the date of commencement of business or the date of incorporation.

You will need to file a complete set of returns, which may include the following:

The specific profits tax return form as issued by the IRD
Supplementary form as issued by the IRD for your tax and financial data
Audited financial statements (i.e. audit report) pertaining to the basis period
Tax computation showing how the amount of assessable profits has been arrived at
Other documents and information specified

Other important taxes

In addition to the profits tax, you may need to account for other important taxes applicable to your business. Knowing these beforehand can help you better manage your company’s finances and ensure you meet the regulatory requirements in Hong Kong.

Salaries tax

In Hong Kong, personal tax is often referred to as salaries tax. Salaries tax is imposed on all employment income arising in or derived from Hong Kong. The tax payable is determined by applying either the standard 15% rate on the first HK$5 million earnings and then 16% on any earnings exceeding HK$5 million, or the progressive rate on the net chargeable income.

For the latter, there are five marginal tax brackets:

Net chargeable income	Rate
HK$0 – HK$50,000	2%
HK$50,001 – HK$100,000	6%
HK$100,001 – HK$150,000	10%
HK$150,001 – HK$200,000	14%
Above HK$200,000	17%

When hiring employees, you must submit the relevant form within three months if you anticipate them to be subject to the salaries tax. You will also need to file the annual employer’s return to report all remunerations paid to your employees for the applicable YA. This applies to employees who are:

Full-time or part-time staff, regardless of income amount
A director, regardless of income amount

Withholding tax

Only specific types of payments are subject to withholding tax in Hong Kong, such as royalties. There are no withholding taxes levied on dividends and interest.

When a Hong Kong-resident company or individual makes payments for royalties to a non-resident entity for services rendered in Hong Kong, a certain portion of the payment must be withheld and paid to the IRD.

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Double Taxation Agreements

Double taxation can occur when you are taxed twice on the same income by two jurisdictions – the jurisdiction where the income arises i.e. the source jurisdiction and the jurisdiction where the income is received i.e. the jurisdiction of residence.

To prevent double taxation, Hong Kong has concluded tax treaties with more than 40 countries.

What is a Double Taxation Agreement?

A Double Taxation Agreement (DTA) is a bilateral agreement between two countries that seeks to eliminate the double taxation of income. Each DTA concluded by Hong Kong is separately negotiated and has specific terms that may differ from one country to another.

However, there are certain general aspects that a typical DTA will address. This includes dividends, interests, royalties, business profits, directors’ fees, and airline or shipping profits.

DTAs primarily benefit Hong Kong resident corporations. You are considered a resident of Hong Kong if:

your company is incorporated in Hong Kong; or
your company is incorporated outside Hong Kong but is managed and controlled from Hong Kong.

Claiming relief under a DTA

To claim benefits as a Hong Kong tax resident under applicable DTAs, you will need to present a Certificate of Resident Status from the IRD to the treaty country. This requires your business, whether incorporated in Hong Kong or abroad, to demonstrate sufficient business substance in Hong Kong.

Accounting standards in Hong Kong

Once you are incorporated in Hong Kong, you must do the due diligence to maintain transparent and reliable financial reporting. The Hong Kong Institute of Certified Public Accountants (HKICPA) is responsible for regulating this.

Hong Kong adopts a Financial Reporting Standards (FRS) framework that has been modelled on International Financial Reporting Standards (IFRS). Known as the Hong Kong Financial Reporting Standards (HKFRS), these are to be adhered to when managing general-purpose financial statements and other financial reporting.

The HKFRS consists of various distinct accounting and financial reporting standards, and several interpretations. Each standard covers a specific topic such as the presentation of financial statements, inventories, statement of cash flows and income taxes.

If you are a profit-oriented entity engaged in commercial, industrial, financial or other similar activities, you will need to prepare your financial statements according to the HKFRS.

For small entities

Depending on your entity type, you may be eligible for reporting exemptions under the Small and Medium-sized Entity Financial Reporting Framework and Financial Reporting Standard (SME-FRF and FRS).

For private entities

If you run a private company that does not have public accountability, you may refer to the HKFRS for Private Entities. This framework eliminates some accounting treatments permitted under the HKFRS. It also removes topics and disclosure requirements that are generally not relevant to private entities, simplifying your compliance.

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