[Hong Kong Online shop owner's guide] How should the profits tax be calculated?

We have previously published articles explaining the circumstances under which online shops need to file taxes. Today, let us explain how the profits tax is calculated and when everyone needs to file a tax return!

Tax exemptions and profit tax rate calculation

In Hong Kong, companies and individuals have experienced one of the most favorable tax systems in the world. They just pay direct taxes and have some generous allowances and replacements, which reduces your tax payable. The following are the taxes that need to be paid in Hong Kong:

Profits tax: The company's first two million metabolic profits are subject to 8.25% of the profits tax. Beyond this number, the company will pay taxes at a rate of 16.5%. However, for unincorporated enterprises, such as sole proprietorships and partnerships, the two-tier tax rates will be set at 7.5% and 15%, respectively.

• Property tax: The standard tax rate is 15%.
• Salaries tax: The tax rate ranges from 2% to 17%, and the standard tax rate is 15%.

The items that Hong Kong will not levy tax include:

• Withholding tax
• Inheritance tax
• Capital gains tax
• Sales tax or expectation
• Dividend tax
• Corporate tax rate

For companies all over the world, this tax rate is the lowest, which is why Hong Kong has become the first to attract company registration. After accrued profits, the amount of taxes that companies may need to pay can be further reduced through various tax reductions and exemptions.

Hong Kong implemented a two-tier profits tax system in 2018. The company's profits tax rate for the first 2 million yuan will be reduced to 8.25%, and subsequent profits will be taxed at 16.5%. As for unincorporated entities (mainly partnerships and sole proprietorships), the profits tax rate for the first 2 million yuan is 7.5%, and the subsequent profits are taxed at 15%.

How is the tax filing period calculated?

The tax year in Hong Kong is 12 months from April 1 to March 31 of the following year. However, if a company is just established, the company’s accounting settlement time may be different from the tax year.

Generally, in April of each year, the tax bureau will release a profit tax return (PTR) to the company. After the company receives the end of the fiscal year, it usually has one month to submit the accounts, but it can be extended.

For newly established companies, they will receive their first Profits Tax Return (PTR) 18 months after their establishment. Within three months from the date of its issuance, a complete PTR should be submitted. For companies that are late in submitting PTR, the tax bureau may incur strict fines for exceeding the time limit issued by companies that fail to comply with the PTR.

What documents do I need to keep for tax filing purposes? 

To put it simply, if you operate a sole proprietorship business (the business is wholly owned by you), you can declare your income in Part 5 of the Individual Tax Return (ie Salaries Tax Return) (BIR60). If the related sole proprietorship business is a small business (that is, the total income in the year of assessment does not exceed HK$2 million), the entrepreneur does not need to attach any accounts and documents when submitting the tax return. If it exceeds, remember to include the relevant documents together submit.

It is worth mentioning that although there is no need to submit any accounts and documents for small businesses when filing taxes, entrepreneurs must still prepare accounts and fill out tax returns based on the prepared accounts. Keep all accounts and documents so that the tax bureau can submit them for inspection in the future.

If you are running a partnership business (such as a joint venture with relatives and friends), please note that you cannot file tax returns through individual tax returns (BIR60). Instead, you need to fill in a corporate profits tax form (BIR52) and submit it When filing tax returns, audited financial statements and other applicable supporting documents are required. It should be noted that all business operators must keep business records (including records of payment of employee salaries) for at least 7 years for easy inspection by the tax bureau.

Introduction to Hong Kong's Audit System

In Hong Kong, the audit is carried out by a Hong Kong certified public accountant. According to the Companies Ordinance, a company must audit its financial statements every year.

Each registered company needs to provide financial statements to the auditor to show the overall business. Financial statements can include:

• Profit and loss statement
• Balance Sheet
• General ledger of business transactions

The auditor will then review these statements and provide professional opinions on the accuracy of the financial statements together with the supporting documents. After the audit, the certified public accountant will receive the audit report and related documents returned by the auditor, and then the certified public accountant will send these reports and audit calculations to the tax bureau.

When the tax bureau receives these audit documents, they will begin to review, usually at least a few weeks or even months.