Profits Tax and Company Tax Filing: Rates, Allowances, and Filing Procedures for Unincorporated Businesses and Limited Companies

Company Tax Filing differs considerably from personal tax filing. The process is more complex and follows specific rules and procedures. This article explains Profits Tax Rates and Tax Allowances, together with the requirements for Unincorporated Business and limited companies, to help you understand how to prepare and submit Company Tax Filing, while complying with the relevant tax rules.

 

Profits Tax Explained

Profits Tax is a direct tax in Hong Kong and a form of income tax. Under section 14 of the Inland Revenue Ordinance, Chapter 112 of the Laws of Hong Kong, Profits Tax applies to individuals or companies carrying on a trade, profession, or business in Hong Kong and is charged on their assessable profits arising in Hong Kong.

 

Who Needs to Pay Profits Tax？

According to IRD guidance, anyone carrying on a trade, profession, or business in Hong Kong and deriving assessable profits from Hong Kong, excluding profits from the sale of capital assets, must pay Profits Tax, regardless of residency. This includes:

• Corporations: companies incorporated under the Companies Ordinance, such as limited companies.
• Persons other than corporations: including sole proprietors, partnerships, trustees, bodies of persons, and self-employed individuals.

   

Hong Kong Profits Tax Rates

From the 2018/19 year of assessment, Hong Kong introduced two-tiered rates alongside standard rates, allowing entities subject to Hong Kong Profits Tax to benefit from lower Profits Tax Rates, provided that no other connected entity has been nominated for the two-tiered Profits Tax rates. Under this system:

 

1. Standard Rates

Corporations are subject to a rate of 16.5%, while persons other than corporations are subject to 15%.

 

2. Two-Tiered Rates

	Rate on the first 2,000,000 of assessable profits	Rate on assessable profits above HK$2,000,000
Corporations	8.25%	16.5%
Persons other than corporations	7.5%	15%

3. Concessionary Rates

Some taxpayers may also qualify for concessionary rates on eligible profits arising from or received in connection with specified qualifying transactions or activities, as follows:

 

Qualifying transactions or specified entities	Concessionary rate
Corporate treasury centres	8.25%
Aircraft and ship leasing	0% or 8.25% (depending on the circumstances)
Insurance	8.25%
Professional reinsurance	8.25%
Family offices	0%
Qualifying intellectual property income	5%
Short- or medium-term debt instruments issued before 1 April 2018	8.25%
Short- or medium-term debt instruments issued on or after 1 April 2018	0%

Profits Tax Formula and Calculation Method

Profits Tax Calculation involves the following 4 main steps:

1. Determine total income: calculate all income earned by the business in Hong Kong during the year of assessment.
2. Deduct allowable expenses: subtract business expenses incurred in producing profits that are deductible under tax law.
3. Calculate assessable profits: deduct all allowable expenses from total income to arrive at assessable profits.
4. Apply the appropriate tax rate: use the rate applicable to the business type, whether incorporated or unincorporated, and the amount of assessable profits.

Profits Tax Formula

Payable Profits Tax = assessable profits × applicable tax rate.

 

Profits Tax Allowances

Neither a limited company nor an Unincorporated Business has a basic Tax Allowances; however, expenses incurred in producing assessable profits can be used for tax deductions, for example:

• Business rent
• Employee salaries
• MPF contributions
• Business entertainment expenses
• Insurance premiums
• Repairs to business premises or equipment
• Purchases of computer hardware and software
• Charitable donations

Limited Company Tax Filing Documents / Steps

 

1. Limited Company Tax Filing Documents

• Profits Tax Return (BIR51): the company’s tax representative uses the financial statements and audit report to complete the Tax Return, providing financial and tax information to help the IRD assess the tax payable.
• Audited financial statements: from April 2023, audited financial statements signed by an independent accountant must be submitted regardless of the company’s income.
• Tax Computation: the accountant adjusts the company’s financial statements under the Inland Revenue Ordinance to determine assessable profits and complete the tax computation.

2. Limited Company Tax Filing Steps

Tax filing involves several stages and may take months from preparing the accounts to completing the return. The steps are:

• Apply for a filing extension: after receiving the return, contact the company’s tax representative promptly to apply for an extension.
• Prepare the accounts: prepare accounts for the financial year, including the income statement and balance sheet, and retain income and expense records.
• Audit the accounts: provide the accounts to an auditor, who examines them in accordance with the applicable requirements and issues an audit opinion.
• Prepare the tax computation: the tax representative uses the audit report to prepare the computation and determine assessable profits.
• Complete the Profits Tax return: use the tax computation to complete the return and provide the relevant financial and tax information.
• Submit the return and documents: send the signed return, audit report, and tax computation to the IRD.
• IRD assessment: the IRD assesses the filed information after approximately three months. An objection can be made if there are errors.
• Pay the tax: once the assessment is confirmed as correct, pay by the specified deadline to complete the process.

Unincorporated Company Tax Filing Documents / Steps

1. Unincorporated Company Tax Filing Documents

• Sole proprietorship: submit the Tax Return—Individuals (BIR60); partnership: submit the Profits Tax Return (BIR52).
• Income statement: an income statement must be submitted when annual business revenue exceeds two million Hong Kong dollars.
• Balance sheet: a balance sheet must also be provided when annual business revenue exceeds two million Hong Kong dollars.

2. Unincorporated Business Tax Filing Steps

Unincorporated Company Tax Filing is relatively straightforward and does not require audited financial statements. The simplified steps are:

• Apply for an extension: after receiving the Tax Return, you may apply to the IRD for more time to submit it.
• Prepare the accounts: an unincorporated business must keep accurate accounting records. Accounts must be prepared and submitted when revenue exceeds two million Hong Kong dollars.
• Complete the Tax Return: use the accounts to complete the Tax Return and claim deductible expenses and allowances.
• Submit the Tax Return and supporting documents: after completing the Tax Return, submit a balance sheet and income statement if revenue exceeds two million.
• Review the assessment and pay: the IRD issues a notice of assessment. Check it and pay the correct amount on time.

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