In this discussion, we shall understand Hong Kong Taxation and Hong Kong Tax Return filing process:
Hong Kong Tax Return filing Process:
Unlike the Income Tax return filing process followed in India, every Hong Kong Company receives a Notice in the form of a Profits Tax Return (PTR). The Notice containing the Profits Tax Return (vocabulary similar to Income Tax return In India) also has a mention of the date by which such return has to be furnished. This notice is generally received in the first week of April each year. For a newly registered Company, the notice is generally received after expiry of 18 months from the date of commencement of business.
For a Company in Hong Kong, the profits tax return has to be filed in Form BIR 51 which is prescribed by Inland Revenue Department of Hong Kong (similar to Central Board of Direct Taxes in India which monitors Direct Tax in India).
A sample of such notice can be seen here.
Please note that under Inland Revenue Ordinance, instead of Company, the word corporation has been used. However, the word corporation has been defined to mean a Company. Thus, both the words shall be used interchangeably in this discussion.
On receipt of Profits tax return notice, a Company has to file complete set of return/ documents which include the following:
a. The specific PTR as issued by IRD.
b. Supplementary forms as issued by IRD for the tax data.
c. Certified copy of Balance Sheet, Auditor’s report, & P& L A/c pertaining to the basis year.
d. A tax computation showing how the amount of assessable profits has been arrived at.
e. Other documents and information as specified in the Notes and Instructions
The financial/ tax year in Hong Kong runs from 1st April to 31st March (called relevant year). The assessment year in Hong Kong, unlike the assessment year in India, is the same as the financial year. This means that for the Financial year beginning from 1st April, 2020 to 31st March, 2021, the assessment year shall be AY 2020-21 in Hong Kong, unlike the assessment year in India, which is AY 2021-22.
A corporation/ company may have a different financial/ closing year as compared to April- March. The financial year adopted by the company is called basis year as per Hong Kong system of taxes.
The basis year ending in the relevant year is taxed in the Profits tax return.
The time limit for filing Hong Kong Profits tax return is a month from the date of receipt of notice. This time limit is generally extended by filing an application with the IRD within one month of the receipt of notice.
There is a concept of Small Company in HK. A Company in Hong Kong shall be termed as a small Company if all the below conditions are satisfied:
1. The company’s gross income for the basis period is less than HKD 2,000,000. Gross income means ALL TYPES OF INCOME including sales and other ordinary business income, proceeds from the sale of capital assets and other non-taxable income, whether or not derived from the principal business activities.
2. The Company has not paid to any payment to non-resident for the use of intellectual property such as patent, trademark, copyright, secret process or a formula topography design
3. The Company is not deemed as an assessee for the assessable profits of a non- resident person or any special purpose vehicles held by such non-resident persons.
4. The Company does not claim deduction for R&D expenditure.
5. The Company does not claim deduction for energy efficient building installation.
6. The Company is not a ship owner
7. The assessable profits of the Company does not include any income from short term debt instruments or any similar income, which are subject to tax at half of the tax rate
8. The Company does not claim any tax relief pursuant to an arrangement under Double Taxation Avoidance Agreement.
9. The Company has not obtained any advance ruling on any tax matter.
10. The Company does not claim debt treatment for an arrangement as a bond issuer, or an originator of specified alternative bond scheme.
11. The Company does not claim deduction for distribution arising out of a regulatory capital security.
12. The Company is not a permanent establishment in Hong Kong of a non- resident Hong Kong person.
If a Company adjudges itself as a small Company, it is exempted from filing various additional documents, and has to file only the documents mentioned in a) and b) above.
The small corporation must prepare other documents before completion of the return and these may be called for by the Inland Revenue Department in appropriate circumstances.
Company as a Resident/ Non- resident in Hong Kong
A Company is regarded as a tax resident of Hong Kong(HK) if the company is incorporated in Hong Kong, of if the company is incorporated outside Hong Kong, it is normally managed or controlled in HK. The concept “normally managed or controlled” does not require that both management and control be exercised in HK. Management refers to the management of daily business operations, or implementation of the decisions made by top management etc. Control refers to the control of the whole business at the top level, including formulating the central policy of the business, making strategic policies of the entity, choosing business financing, evaluating business performance etc.
Hong Kong Taxation :
From AY 2018-19 onwards, Hong Kong taxation rate is 8.25% for first HKD 2,000,000 assessable profits and after that it is 16.5%.
100% of the profits tax is waived for Assessment year 2021-22 subject to a ceiling of HKD 10,000 per assessee. This waiver is separately effected each year in the tax budget introduced in Hong Kong in February. For Assessment year 2022-23, it is proposed to continue the same waiver.
The above Hong Kong taxation structure is generally regarded as a two- tiered tax rate. However, a Company which has connected entities in Hong Kong can elect for two- tiered tax rates for only one of the entities and rest of the entities shall be taxable at the higher rate of 16.5%.
The IRD has introduced 10 supplementary forms to Profits Tax Return (BIRS1 to BIRS10) from 1st April, 2019. The supplementary forms report information on preferential regimes and tax incentives availed by a Company. Such forms are filed along with the return. A Company shall have to file a supplementary form if it is applicable on such Company. Below are the supplementary forms to Profits Tax Return:
Supplementary Form S1 – Person electing for two-tiered profits tax rates
Supplementary Form S2 – Transfer pricing
Supplementary Form S3 – Expenditure on research & development
Supplementary Form S4 – Expenditure on energy efficient building installation
Supplementary Form S5 – Ship-owner
Supplementary Form S6 – Professional reinsurer
Supplementary Form S7 – Authorized captive insurer
Supplementary Form S8 – Qualifying corporate treasury centre
Supplementary Form S9 – Qualifying aircraft lessor
Supplementary Form S10 – Qualifying aircraft leasing manager
Please note that the supplementary form S1 “person electing for two-tiered tax rates” has to be submitted only if the company has connected non-listed entities carrying on a trade, profession or business in Hong Kong for the subject year.
For more information on filing of Profits Tax Return in Hong Kong, you may please get in touch with us at mail@klaggarwal.com