Tax Computation Template (Hong Kong)

Profits tax for a Hong Kong company is computed under the Inland Revenue Ordinance (Cap. 112) on assessable profits arising in or derived from Hong Kong from a trade, profession, or business. The starting point is the net profit per the audited financial statements, which is then adjusted for items that are either non-deductible under Section 17 of Cap. 112 — such as capital expenditure, private expenses, and penalties — or tax-exempt such as dividend income from a Hong Kong company and certain offshore profits. Depreciation charged in the accounts is added back, and instead, tax depreciation allowances calculated under Section 18F (initial allowances at 60%) and Section 18G (annual allowances at 10%, 20%, or 30% depending on asset class) are deducted. The resulting figure is the adjusted profit, from which any brought-forward unabsorbed losses from prior years are deducted to arrive at the net assessable profits. Under the two-tier profits tax system introduced in 2018, the first HKD 2 million of assessable profits for a qualifying corporation is taxed at 8.25%, with the remainder taxed at 16.5%. Only one entity in a group of connected companies can benefit from the reduced 8.25% rate. The final tax payable is the assessable profits multiplied by the applicable rate, less any available provisional tax paid. The Tax Computation Template on forms-legal.com provides a structured workings sheet covering all these adjustment items.

Section 16 of the Inland Revenue Ordinance (Cap. 112) sets out the general deduction rule: expenses are deductible if they are incurred in the production of chargeable profits and are not capital in nature. Common allowable deductions include rent for business premises, salaries and wages of employees, mandatory provident fund contributions up to 15% of relevant income, interest on borrowed money used to produce assessable profits where the lender is a financial institution or the interest is subject to Hong Kong tax, research and development expenditure under Section 16B, charitable donations to approved charities under Section 16D up to 35% of assessable profits, and bad debts that are trade-related and have been definitively written off. Disallowable items under Section 17 include domestic or private expenses, capital expenditure (which instead qualifies for depreciation allowances), taxes paid, and expenses not wholly and exclusively incurred for the business. The distinction between revenue and capital expenditure is a recurring area of dispute with the Inland Revenue Department and has been litigated extensively before the Board of Review and the Court of Appeal. A Tax Computation Template helps accountants and tax practitioners systematically record all adjustments and support the profits tax return filed with the IRD.

Hong Kong operates a schedular tax system under the Inland Revenue Ordinance (Cap. 112) with three separate charging sections. Profits tax under Part IV of Cap. 112 charges corporations at 16.5% (8.25% on the first HKD 2 million under the two-tier system) and unincorporated businesses at 15% (7.5% on the first HKD 2 million) on assessable profits from a Hong Kong trade, profession, or business. Salaries tax under Part III of Cap. 112 charges individuals on income from employment, office, or pension sourced in Hong Kong at progressive rates of 2%, 6%, 10%, 14%, and 17% on net chargeable income, capped at a standard rate of 15% on net income. Property tax under Part II of Cap. 112 charges owners of land and buildings in Hong Kong at 15% on the net assessable value of the property — being the actual rent received less a 20% statutory allowance for repairs and outgoings. Individuals who both earn employment income and own rental property may elect for Personal Assessment under Part VII, which combines all their Hong Kong income into a single computation and may result in a lower overall tax burden where substantial personal allowances and deductions are available. The Tax Computation Template on forms-legal.com is primarily designed for profits tax computations but the principles of adjustment from accounts profit to assessable profit apply across all three charging heads.

The Inland Revenue Department issues profits tax return forms (BIR51 for corporations, BIR52 for partnerships, and BIR54 for bodies of persons) under Section 51 of the Inland Revenue Ordinance (Cap. 112) typically in April each year for the preceding year of assessment. Newly registered businesses receive their first return around 18 months after commencement. The standard deadline for filing a profits tax return is one month from the date of issue, but companies that engage a tax representative registered with the IRD are eligible for an extended filing deadline under the Block Extension Scheme, which allows filing up to the following January or April depending on the company's accounting year-end date. Returns must be accompanied by audited financial statements and a signed tax computation supporting the figures declared. Late filing is an offence under Section 80 of Cap. 112 and may result in a penalty and estimated assessment by the IRD Commissioner. If the assessed profits differ from the declared figures, the taxpayer has one month from the date of the notice of assessment to lodge an objection under Section 64 of Cap. 112. A Tax Computation Template prepared contemporaneously with the financial statements is the most reliable basis for an accurate and defensible profits tax return.

Hong Kong adopts a territorial basis of taxation under the Inland Revenue Ordinance (Cap. 112), meaning only profits that arise in or are derived from Hong Kong are subject to profits tax. Profits from operations carried out entirely outside Hong Kong — often referred to as offshore profits — are exempt from Hong Kong profits tax, but the company must establish to the satisfaction of the Inland Revenue Department that the operations giving rise to the profits were performed outside Hong Kong. The IRD applies the operations test, examining where contracts are negotiated and concluded, where goods are sourced and delivered, and where services are performed. Since 2023, Hong Kong has introduced a Foreign Source Income Exemption regime under the Inland Revenue (Amendment) (Taxation on Specified Foreign-Sourced Income) Ordinance 2022, which requires certain passive income — dividends, interest, royalties, and disposal gains — received by large multinational enterprises to meet economic substance requirements in Hong Kong to retain the offshore exemption. The IRD may conduct field audits or desk reviews to verify offshore claims, and the burden of proof lies with the taxpayer. A well-prepared Tax Computation Template that clearly separates Hong Kong and offshore income, supported by contemporaneous documentation of where the relevant operations were performed, is essential for defending an offshore profits claim.

Depreciation allowances under the Inland Revenue Ordinance (Cap. 112) replace the accounting depreciation charged in the financial statements and are the mechanism by which capital expenditure on plant and machinery is given tax relief. Section 18F of Cap. 112 provides an initial allowance of 60% of the cost of qualifying plant and machinery in the year of acquisition, regardless of when during the year the asset was purchased. Section 18G then provides an annual allowance on the remaining written-down value at rates of 10%, 20%, or 30% depending on the asset class as prescribed in Schedule 3 of Cap. 112. Class 1 assets (such as computers and information technology equipment) attract a 30% annual allowance; Class 2 assets (such as motor vehicles) attract a 20% annual allowance; and Class 3 assets (such as furniture and fixtures) attract a 10% annual allowance. Industrial buildings and structures may qualify for an initial allowance of 20% and an annual allowance of 4% under Sections 33A and 34 of Cap. 112. When an asset is disposed of, a balancing allowance or balancing charge arises on the difference between the disposal proceeds and the tax written-down value. The Tax Computation Template on forms-legal.com includes a depreciation allowance schedule section where these calculations can be set out and referenced in the main computation workings submitted to the IRD.