Profits Tax: Who Pays and How It's Calculated

Profits tax is the main type of corporate taxation in Hong Kong. It is levied on income earned from trade, profession, or business carried out in Hong Kong. The tax is based on the territorial source principle, which means that only profits sourced in Hong Kong are taxable.

Who Pays Profits Tax?

The following types of entities are subject to profits tax if they earn income in or from Hong Kong:

• Private limited companies

• Partnerships

• Sole proprietorships

• Foreign companies with a permanent establishment in Hong Kong

Even if a company is registered outside Hong Kong, it may be liable for profits tax if it has operations, staff, or clients in Hong Kong that generate income.

What Income Is Taxable?

Only profits arising in or derived from Hong Kong are subject to tax. Examples of taxable income include:

• Sales of goods or services in Hong Kong

• Consultancy or management fees from local clients

• Rental income from Hong Kong property

• Commission income for deals concluded in Hong Kong

Income that is clearly foreign-sourced may be exempt, but companies must apply for offshore status and support the claim with proper documentation.

Tax Rates

Hong Kong operates a two-tiered profits tax regime:

• 8.25% on the first HKD 2 million of assessable profits

• 16.5% on profits above HKD 2 million

These rates apply to corporations. For unincorporated businesses (e.g., sole proprietorships), the rates are 7.5% and 15%, respectively.

How Are Profits Calculated?

Assessable profits are calculated as:
Total Revenue – Allowable Expenses – Deductions

Examples of allowable expenses:

• Staff salaries

• Rent and utilities

• Business travel

• Marketing and advertising

• Approved charitable donations

• Depreciation allowances on fixed assets

Certain expenses are not deductible, such as:

• Capital expenditures

• Domestic or private expenses

• Fines and penalties

Filing and Payment

The Inland Revenue Department (IRD) typically issues the Profits Tax Return (PTR) in April each year. Deadlines for filing depend on the financial year-end and whether the company has assessable profits.

Tax is generally paid in two installments, usually around November and April, depending on the company's filing timeline.

Offshore Income and Exemption

Companies with income earned entirely outside Hong Kong can apply for an offshore profits claim. If approved, that income is not subject to profits tax. However, the IRD requires strong supporting evidence, such as:

• No clients or contracts executed in Hong Kong

• No staff, offices in Hong Kong

• Business operations conducted fully overseas

Summary

Profits tax in Hong Kong is straightforward and relatively low compared to other jurisdictions. Combined with the territorial tax system, it offers significant advantages for international businesses — especially those with minimal physical presence in Hong Kong.