Hong Kong's Corporate Tax Rate in 2024: A Beginner's Guide

Hong Kong is known for having one of the world's simplest and most business-friendly tax systems, making the city a preferred choice for conducting international business in Asia.

Many entrepreneurs choose to open a company in Hong Kong – which is no surprise since Hong Kong offers significant advantages whether you're setting up an onshore or offshore business. 

Understanding the source of your profits—where your business activities occur and the nature of your business activities —is key to how you will be taxed. This guide provides insights into leveraging Hong Kong's tax system to benefit your business.

The taxable profit is recognised by the source of income - you may hear this phrased as a “schedular tax system” from official government sources. For example, dividends are generally not taxed, but profits are. 

Most notably, Hong Kong only taxes profits arising in or from its jurisdiction. What exactly does this mean?

Lately, the term "offshore" has gained significant traction, though it frequently connotes tax avoidance or evasion.

In this context, an offshore company is one that runs its business activities outside the jurisdiction where it was incorporated – in this case, outside of Hong Kong. 

For example, an ecommerce company that services North American clients and sources its products from China, which happens to be incorporated in Hong Kong, is considered an offshore company and may qualify for Hong Kong’s 0% offshore tax. 

In contrast, an onshore company is a company that conducts its main business activity inside the jurisdiction where it is incorporated. 

For example, if your company owns and operates bakeries located in Hong Kong and your employees and customers are physically present in your stores, using Hong Kong dollars, then your company is an onshore company, and your profits will have the Hong Kong profits tax rate applied to it.  

 A key difference between offshore and onshore companies in Hong Kong is that an offshore company can apply for special status to be exempt from paying taxes. In contrast, an onshore company must pay taxes according to its taxable income.

Contrary to popular belief, the term "offshore" is a status a company registered in Hong Kong can obtain.

It allows them not to pay taxes as long as there is substantial proof that the source of income came from outside of Hong Kong and no business activities were performed in Hong Kong to generate this income, such as providing a service or selling goods. 

In this sense, a company cannot automatically become offshore from the moment of incorporation, just from being an entity registered in Hong Kong. There must be an application and a review to obtain the status from the Hong Kong Inland Revenue Department.

Now that we understand the two main ways Hong Kong companies may be taxed, let’s look at an overview of the tax system in Hong Kong:

• Hong Kong's corporate tax system is called profits tax and follows a flat rate and territorial principle.
• The normal Profits Tax Rate in Hong Kong is 16.5% for Corporate Income Tax.

Starting in the 2018 fiscal period, the Hong Kong authorities introduced the two-tier tax system, allowing companies to have a preferential tax rate for a set amount of profit. More details will be explained below. 

The income from running operations in Hong Kong falls under the profit tax and should be taxable.  

• Most services and items have no value-added tax (VAT) or sales tax.
• There is no Capital Gains Tax. 
• Dividend or interest income is not subject to withholding taxes, whether generated in Hong Kong or overseas. However, it is important to note that earnings from qualifying debt instruments are taxed like regular profit tax. In other words, interest income generated from deposits that were used to secure a loan will be taxed.
• The Personal Income or Salaries Tax Rate is charged according to the individual's income. For more information, please check our article on the Salaries Tax. 
• Individuals who profit from owning land or buildings in Hong Kong are subject to the Property Tax Rate, which is set at 15% of the assessable value of the property.  

Beyond the tax types we've covered, this Special Administrative Region offers attractive tax incentives that make setting up a business here even more appealing.

Hong Kong also uses a territorial system, where the profits tax is based on profits derived from a trade or business conducted in Hong Kong.

If a company is established within Hong Kong, but the profits are made entirely from outside its borders, the business owners can apply for a special status to access a rate of 0% on profits tax. 

Hong Kong also offers a provisional profits tax system. This is where the Hong Kong government estimates the taxes for your business in advance. This estimation allows you to pay your profits tax at more convenient times, like when cash flow is high. Any overpayment is credited towards future taxes.

This type of profits tax can be paid in two separate installments. The first installment is approximately 75%, while the remaining 25% should be paid after three months.

After the assessable profits tax of the year has been determined, the company can receive a tax credit for the amount paid. Any excess amount paid can be credited to the company for the next fiscal period. 

Companies that qualify for the provisional profits tax can apply for clarification with the authorities during a valid period. Typically, this period is one month before the due date or two weeks after the payment notice.

Another element that Hong Kong's tax system follows is the principle of a flat-rate tax, which means that the tax rate is not progressive or increases with respect to the profit amount. The Inland Revenue Department offers two profit tax rates for companies, the single-tier and the two-tier. 

• This option gives a rate of 16.5% based on assessable profits for companies.
• However, for unincorporated companies, the rate is 15%.  

• For incorporated and unincorporated companies, the second option lowers the tax rate for the first HKD 2 million of assessable profits.
• Companies with profits under the first $2 million cap get a concessionary tax rate of 8.25%. Any remaining profits above $2 million will be taxed at 16.5%.
• This rate can be helpful for small and medium-sized enterprises, as it reduces the amount of taxes to pay, starting the year of assessment 2018/2019. To consult the tax rates in Hong Kong, please see the following link from the tax authority. 
• Unincorporated businesses with profits under the first $2 million are taxed at 7.5%, while all other profits above the first $2 million will be taxed at 15%.

To make Hong Kong company incorporations more attractive, the local authorities have created a series of tax incentives. Here we list the most noteworthy incentives: 

• Hong Kong offers a 100% write-off, also called a deduction, for expenses from purchasing machinery, mainly related to manufacturing and computer hardware and software.
• A period of five years to write off expenses for renovating or refurbishing a business's grounds or building. 
• Expenses from purchasing machinery made for environmental protection and environmentally friendly vehicles receive a 100% deduction.
• In addition, there is a 100% deduction on profits tax offered for environmental protection installation costs as long as the expense is incurred on or after 1 April 2018.
• Tax concessions are offered for mutual funds and trusts. 
• There are profit tax deductions for expenses earned by companies that sell intellectual property, mainly patents, copyrights, rights in performances, etc.
• Hong Kong-operated funds are eligible for tax exemption on asset transactions subject to specific conditions, regardless of structure, size, purpose, or management location.
• Profit tax exemptions are also offered on investments in local and overseas private companies. 

As of 2023, Hong Kong has established comprehensive agreements on income taxation with these jurisdictions.

The Hong Kong Inland Revenue Department issues profit tax returns to companies in April without delay every year.

However, depending on the company’s chosen fiscal year, the due date to submit the declaration can change from April to November of the following year. 

Although extensions can be requested from the tax authority, it is important to prepare beforehand and submit all the supporting documents and forms in due time.

Failing to submit the forms in time can generate penalties, fees, and additional assessment from the Inland Revenue Department.

For newly registered businesses, there is a grace period of 18 months after the date of incorporation, in which the Hong Kong Inland Revenue Department issues the first profit tax return.

While one of the many attractive features of Hong Kong is its simple tax system, some options allow companies to maximise their profits.

However, it should not be forgotten that compliance is king. Preparing to submit everything before the deadlines can save your business time and, more importantly, money by avoiding unnecessary penalties. 

If you need a company to support you with tax planning, you can visit our Company Secretary Review page and find the right service provider for your company.