Hong Kong profits tax, audited accounts and records

Hong Kong profits tax is charged on profits arising in or derived from Hong Kong from a trade, profession or business carried on here. A company pays 8.25% on its first HK$2 million of assessable profits and 16.5% on the rest. It files a Profits Tax Return (BIR51) with audited financial statements, unless it is dormant. Every business must keep records of its income and expenditure for at least seven years. These rules come from the Inland Revenue Department (IRD), and this page sets out what they mean for a small company or sole proprietor.

Who pays profits tax

The IRD’sprofits tax pagesays that persons carrying on a trade, profession or business in Hong Kong, including corporations, partnerships, trustees and bodies of persons, are chargeable on all profits arising in or derived from Hong Kong from that business. Profits from the sale of capital assets are excluded. Whether a particular profit arises in Hong Kong depends on the facts of the business, which is a question for an accountant or the IRD, not for a directory.

The two-tier rates

Since the 2018/19 year of assessment, the IRD’stwo-tiered rates regimehas applied:

If an entity has one or more connected entities, only the one nominated can use the lower rate. The others pay the full rate on all their profits. The election and the exclusions are intwo-tier profits tax.

The return and the accounts

A company files the Profits Tax Return for corporations, BIR51. The IRD’sprofits tax return FAQand theBIR51 noteslist what goes with it:

• a certified copy of the statement of financial position (balance sheet) and the statement of comprehensive income (profit and loss account) for the basis period;
• a tax computation, with supporting schedules, showing how the assessable profits or adjusted loss were worked out;
• any other documents the notes to the return ask for.

For corporations, audited financial statements go with the return in all cases except dormant companies within the terms of the Companies Ordinance. The accounts must carry the wet-ink signature, or be a photocopy certified as true by a director, a principal officer or a certified public accountant. The return also asks for the practising certificate number of the certified public accountant (practising) who signed the auditor’s report.

Unincorporated businesses file differently. A partnership uses the Profits Tax Return BIR52. A sole proprietor reports a business they own outright on Part 5 of the Tax Return – Individuals (BIR60), and the IRD’sreporting pagesays no financial statements need be attached if the business’s gross income does not exceed HK$2,000,000. More on that route is insole proprietorship tax and records.

Your first return, and if none arrives

The IRD issues the first Profits Tax Return about 18 months after a new company is incorporated, or after a new partnership starts business. Check the due date printed on it, since filing periods depend on your file and accounting date. If you are chargeable to tax and have not been sent a return, the IRD’snotification of chargeability pagesays you must tell the Commissioner in writing no later than four months after the end of the basis period for that year of assessment.

A company’s year, step by step

1. Record every receipt and payment as you go, with the vouchers behind them.
2. Close the accounts at your accounting date.
3. Have a certified public accountant (practising) audit the financial statements.
4. Prepare the tax computation from the audited figures.
5. File BIR51 with the signed accounts and computation by the due date on the return.
6. Keep the working papers and records for at least seven years.

Keeping business records

Section 51C of the Inland Revenue Ordinance requires every person carrying on a business in Hong Kong to keep sufficient records, in English or Chinese, of income and expenditure so that assessable profits can be readily worked out. The IRD’srecord-keeping pagelists what that includes:

• books of account recording receipts and payments, or income and expenditure;
• vouchers, bank statements, invoices and receipts;
• records of the business’s assets and liabilities;
• day-to-day entries of all money received and spent;
• for a business dealing in goods, records of goods bought and sold, with the sellers, buyers and invoices.

The records must be kept for at least seven years after the transactions they relate to are completed. Failing to comply without reasonable excuse can lead to a fine of up to HK$100,000.

Not the same as the other yearly bills

Profits tax is separate frombusiness registrationand from the Companies Registry’s annual return. They are three obligations, owed to two offices, each on its own dates;annual return vs business registration renewaluntangles two of them. For the audit and the computation, compareaccounting firmsin our directory. This page is not tax advice. The IRD assesses the tax.