Frequently asked questions – Accounting, Audit and Taxation
1. When should a limited company submit the Profit Tax Return after incorporation?
Every limited company will receive their first Profit Tax Return from the Inland Revenue Department (IRD) 18 months after incorporation. The Profit Tax Return will be issued in April (normally) every year thereafter.
2. What is the tax rate for Profit Tax? How to compute Profit Tax?
With effect from the year of assessment 2018/19, under the two-tiered profits tax rates regime, the profits tax rate for the first $2 million of assessable profits will be lowered to 8.25% for corporations and 7.5% for unincorporated businesses (mostly partnerships and sole proprietorships). Assessable profits above $2 million will continue to be subject to the rate of 16.5% for corporations and standard rate of 15% for unincorporated businesses.
3. How to submit the Profit Tax Return for a limited company?
The accounts of a limited company shall be audited by a Certified Public Accountant before submitting to the IRD together with an auditor’s report and Profit Tax Return.
4. Does every limited company have tax payable to the IRD?
Not necessarily. However, all limited companies shall submit a Profit Tax Return every year for IRD assessment on the amount of tax payable.
5. Under what situation does a limited company need to pay Profit Tax?
Hong Kong adopts a territorial basis for taxing profits derived from a trade, profession, or business carried on in Hong Kong. Profits Tax is only charged on profits which arise in or are derived from Hong Kong. In simple terms this means that a person who carries on a business in Hong Kong but derives profits from another place is not required to pay tax in Hong Kong on those profits.
The principle itself is very clear but its application in particular cases can be, at times, contentious. You may refer to the IRD link below for more information.
https://www.ird.gov.hk/eng/paf/bus_pft_tsp.htm
6. What is Provisional Profit Tax?
Profits tax is chargeable on the assessable profits for each year of assessment. As the assessable profits for any particular year cannot be known until after the end of the year concerned, a provisional tax charge has to be raised. When the assessable profits for the year of assessment are subsequently ascertained, an assessment will be made and the provisional profits tax paid will be utilized to offset the tax liability under the assessment.
7. What are the consequences of late filing of the Profit Tax return?
The exposure to treble the amount of tax undercharged is applicable to late filing of tax return.
8. Does a company need to file the Profit Tax Return even when the company has not commenced business?
Yes. A company has to complete and file the Profit Tax Return with the IRD after receiving it, even when the company might still have not commenced business.
9. If a company receives a notification of “no Profit Tax Return to be issued to the company”, does it mean that the company does not need to prepare its audited account?
No. The notification of “no Profit Tax Return to the company ” only means IRD not issued Profit Tax Return to the company actively. However, it is the responsibility of the company to apply for the Profit Tax Return and submit it to the IRD with an Audited Account whenever a profit arises in the business. Therefore, a company still needs to prepare its audited account every year.
10. Does a dormant company need to file the Profit Tax Return?
According to section 5 of the Companies Ordinance, a private company may pass and deliver to the Registrar of Companies for registration a special resolution declaring that the company will become dormant. A dormant company is exempted from preparing financial statement and director report and appointing auditor and prepared auditor’s report. However, it is still required to pay the business registration fee and files its Profit Tax Return under the Business Registration Ordinance and Inland Revenue Ordinance.
