Despite Hong Kong’s attractive tax environment, business owners cannot completely escape paying taxes. But how are businesses taxed and what types of taxes are they subject to?
For small business owners who have set up or are considering setting up a business in Hong Kong, it is essential to work on tax avoidance schemes in order to pay as little tax as possible.
This article provides an overview of the obligations, taxable earnings on established companies, tax allowances and various exemptions your business can benefit from if you start your business in Hong Kong.
What are the taxable earnings in Hong Kong?
If you decide to set up and start business in Hong Kong, you should keep in mind that taxes will apply to your income. The main taxable incomes of SMEs registered in Hong Kong are:
- Income generated from business activities;
- Remuneration paid as an employee of the organization.
Any entity registered in Hong Kong is required to pay corporate tax, or more specifically income tax. This means that small business owners must pay taxes on their profits and not on their personal income.
Revenue is defined as money earned from the sale of products or the provision of services. In other words, revenue equals sales. For example, if you have a shoe store and you earn HK$1,000 per month, this amount will be considered your income.
What is the corporate tax rate?
Currently, Hong Kong has two different tax rates for small businesses:
- The one-tier corporate tax structure: under the one-tier corporate tax model, organizations are subject to a tax rate of 16.5% on taxable income.
- The two-tier corporate tax structure: the two-tier corporate tax system has a different approach, as companies are subject to an 8.25% rate on the first HK$2 million, and then must pay a 16.5% levy on any additional profits. The objective of this tax arrangement is to reduce the tax liability of the majority of small businesses in Hong Kong that are required to pay tax.
Tax-deductible and non-tax-deductible expenses
In Hong Kong, certain expenses incurred in the course of business may be deductible from your taxes. For example, if the computer software used for the job has reached its expiration date, its replacement may be a tax-deductible expense. When buyers submit their orders, this software is used to fulfill them in a productive manner. Any expense that helps generate a profit and does not require a large investment is tax deductible.
Below is a list of some expenses that are allowed and not allowed for tax deductions:
Allowable expenses for tax deductions
- Interest expenses, such as interest paid on a loan;
- Rental for business purposes;
- Foreign taxes paid on income (the latter will be subject to foreign tax);
- Bad debts that have been written off;
- Technical training;
- Building refurbishment;
- Capital expenditures on prescribed capital assets and environmental protection machinery;
- Research and development expenditures;
- Royalties and service fees to foreign affiliates;
- Expenses incurred for the purchase of patents, registration of trademarks, copyrights and registration of designs;
- Pension plan contributions. This will be subject to certain limitations;
- Charitable donations.
Expenses not allowed for tax deductions
- Household or private expenses that are not related to the business;
- Capital losses;
- Expenses incurred for the improvement of your property;
- Any amount recoverable under an insurance or indemnity contract;
- Rental income or expenses not related to the business;
- Taxes paid on corporate profits;
- Interest expense paid to a foreign beneficiary;
- Organization and start-up costs;
- Cost of acquiring the business;
- Fines and penalties.
Are there any tax cuts for small businesses in Hong Kong?
In May 2021, the Financial Secretary suggested a one-time 100% reduction in income tax, payroll tax and individual assessment tax for the assessment period 2020/2021, provided it does not exceed HK$10,000.
This implies that small organizations will enjoy tax relief on their income. For payroll taxes, a limit will be applied to each individual. Even better, business owners who are charged separately for income tax and payroll tax will be able to enjoy a tax deduction for both.
How can I reduce my Hong Kong small business taxable income?
Here are some ways to reduce your taxable income:
- Calculate your full taxable proceeds;
- Remove deductible disbursements;
- Deduct the value of unused items;
- Deduct donations made;
- Subtract your capital deductions;
Overall taxable income is the net gain you have acquired at the end of the financial term. This income must be from any business in Hong Kong, rental of personal property, interest income and grants.
Our firm has been established in Hong Kong since 1998 and offers you a tailor-made support for the creation of your company and its follow-up. We also act as your company secretary, a mandatory role for all companies in Hong Kong. The latter acts only as a representative to the authorities and does not interfere in any way in the management of your business.
For more information, please contact us at firstname.lastname@example.org.