1
Special Provisions for Ascertaining Liability to Profits
Tax
Certain Amounts Deemed to be Trading
Receipts
The following sums are deemed to be receipts arising in or
derived from Hong Kong from a trade, profession or business carried
on in Hong Kong under the Inland Revenue Ordinance (I.R.O.) :-
- Sums received from the exhibition or use in Hong Kong of
cinematography or television film or tape, sound recording or their
connected advertising materials [section 15(1)(a)].
- Sums received for the use, or the right to the use, in Hong
Kong of any patent, design, trade mark, copyright material,
*layout-design (topography) of an integrated circuit, *performer's
right, *plant variety right, secret process or formula [section
15(1)(b)].
- Sums received for the use, or the right to the use, outside
Hong Kong when such sums are deductible in ascertaining the
assessable profits of a person under Profits Tax, of any patent,
design, trade mark, copyright material, *layout-design (topography)
of an integrated circuit, *performer's right, *plant variety right,
secret process or formula [section 15(1)(ba)].
- Sums for an assignment of, or an agreement to assign, a
performer's right in relation to a performance given by a performer
in Hong Kong on or after 29 June 2018 and the sums were paid or
accrued to the performer or an organizer [section 15(1)(bb)].
- Sums received by or accrued to a person carrying on business in
Hong Kong by way of grant, subsidy or similar financial assistance
other than sums in connection with capital expenditure [section
15(1)(c)].
- Sums received by way of hire, rental or similar charges for the
use of movable property or the right to use movable property in
Hong Kong [section 15(1)(d)].
(*not applicable for sums received or accrued before 29 June
2018)
Non-Residents and Agents Dealing with
Non-Residents
- A non-resident is chargeable to tax either directly or in the
name of his agent in respect of all his profits arising in or
derived from Hong Kong, from any trade, profession or business
carried on there, whether or not the agent has the receipt of the
profits, and the tax may be recovered out of the assets of the
non-resident or from the agent. The agent is required to retain
from the assets sufficient money to pay the tax.
- A non-resident who receives sums specified in section 15(1)(a),
(b), (ba) and (bb), or a non-resident entertainer or sportsman who
receives sums from the performance in Hong Kong of an activity in
his character as entertainer or sportsman is chargeable to tax in
the name of the person who paid or credited the sums to the
non-resident. The person who pays or credits such sum is required
at the time he makes the payment or credit to deduct from those
sums an amount sufficient to meet the tax due.
- Resident consignees are required to furnish quarterly returns
to the Commissioner showing the gross proceeds from sales on behalf
of their non-resident consignors and to pay to the Commissioner a
sum equal to one per cent of such proceeds, or such lesser sum as
may have been agreed with the Commissioner.
- Where the true profits of a non-resident from a trade,
profession or business carried on in Hong Kong cannot be readily
ascertained, they may be computed on a fair percentage of the
turnover in Hong Kong.
- Where the accounts of a non-resident whose head office is
outside Hong Kong do not disclose the true profits of a Hong Kong
permanent establishment, the profit of the branch for tax purposes
is taken to be the amount which bears to the taxpayer's total
profits the same proportion as his turnover in Hong Kong bears to
his total turnover.
More information:
- Taxation of Non-resident Entertainers and Sportsmen in Hong
Kong
- FAQ: Non-resident Persons (Other Than Individuals)
- Non-resident Professionals
- Payments to Non-residents Professionals
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Assessable Profits
The Assessable Profits (or Adjusted Loss) are the net profits
(or loss) [other than profits (or loss) arising from the sale of
capital assets] for the basis period, arising in or derived from
Hong Kong, calculated in accordance with the provisions of Part IV
of the I.R.O.
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Basis Period
The Basis period is either:-
- the year ended 31 March during the relevant year;
- where the annual accounts are made up to any day other than 31
March, the year ended on that day in the relevant year;
- where the accounts are made up for each lunar year, the lunar
year ended in the relevant year;
- where you commenced or ceased to carry on a business or changed
its accounting date, the special period prescribed by sections 18C,
18D or 18E of the I.R.O.;
- for commencement case, if accounts for this period have not
been prepared the profits to be returned may be calculated by
apportioning the profits shown by the accounts which cover the
period; or
- for cessation/transfer of business case, special rules apply:-
- where the business does not cease but, in whole or in part, is
transferred to or carried on by another person;
- in the case of cessation occurring on or after 1 April 1979 of
a business which commenced before 1 April 1974.
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Exemption
The following sums are excluded from the assessable
profits:-
- dividends received from a corporation which is subject to Hong
Kong Profits Tax;
- amounts already included in the assessable profits of other
persons chargeable to Profits Tax;
- interest on Tax Reserve Certificates;
- interest on, and any profit made in respect of a bond issued
under the Loans Ordinance (Cap. 61) or the Loans (Government Bonds)
Ordinance (Cap. 64), or in respect of an Exchange Fund debt
instrument or in respect of a Hong Kong dollar-denominated
multilateral agency debt instrument;
- interest income and trading profits derived from long term debt
instruments;
- interest, profits or gains from qualifying debt instruments
(issued on or after 1 April 2018) exempted from payment of Profits
Tax; and
- sums received or accrued in respect of a specified investment
scheme by or to the person as: -
- a person chargeable to Profits Tax in respect of a mutual fund,
unit trust or similar investment scheme that is authorized as a
collective investment scheme under section 104 of the Securities
and Futures Ordinance (Cap. 571); or
- a person chargeable to Profits Tax in respect of a mutual fund,
unit trust or similar investment scheme where the Commissioner is
satisfied that the mutual fund, unit trust or investment scheme is
a bona fide widely held investment scheme which complies with the
requirements of a supervisory authority within an acceptable
regulatory regime.
A person is exempt from payment of profits tax in
respect of the following sums:-
- interest (accrued on or after 22 June 1998) that is derived
from any deposit placed in Hong Kong with an authorized
institution, excluding interest received by or accrued to a
financial institution; and
- starting from the year of assessment 2009/10, interest on and
any profit made in respect of Renminbi sovereign bonds.
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Deductions
Deductible Expenses
Generally, all outgoings and expenses, to the extent to which
they have been incurred by the taxpayer in the production of
chargeable profits, are allowed as deductions. Reference can be
made to section 16 of the I.R.O.
A transfer of certain allowable head office administrative
expenses by means of a charge to a local branch or subsidiary in
Hong Kong would be allowed as a deduction for Hong Kong tax
purposes, to the extent to which they were incurred during the
basis period for the year of assessment in the production of
profits chargeable to tax.
Non-deductible Items
In computing the assessable profits deduction is specifically
prohibited in respect of the following:-
- domestic or private expenses and any sums not expended for the
purpose of producing the profits;
- any loss or withdrawal of capital, the cost of improvements and
any expenditure of a capital nature;
- any sum recoverable under insurance or contract of
indemnity;
- rent of or expenses relating to premises not occupied or used
for the purpose of producing the profits;
- taxes payable under the I.R.O., except Salaries Tax paid in
respect of employees' remuneration;
- any remuneration or interest on capital or loans payable to or,
subject to section 16AA, contribution made to a mandatory provident
fund scheme in respect of the proprietor or the proprietor's spouse
or, in case of a partnership, to its partners or their
spouses.
Expenditure on Building Refurbishment
A person who incurs capital expenditure on the renovation or
refurbishment of business premises is allowed to deduct that
expenditure over a period of 5 years in equal instalments
commencing in the year in which the expenditure is made.
Expenditure on plant and machinery specially related to
manufacturing, and on computer hardware and software
For this kind of expenditure, a full deduction is allowed in the
basis period in which the expenditure was incurred.
Expenditure on Environmental Protection
Facilities
- Expenditure on environmental protection machinery
- With effect from the year of assessment 2008/09, a full
deduction is allowed during the basis period in which the
expenditure is incurred.
- Expenditure on environmental protection installation
- With effect from the year of assessment 2008/09, a deduction at
20% of the expenditure is allowed in each of the 5 consecutive
years commencing from the year in which the expenditure is
incurred.
- With effect from the year of assessment 2018/19, a full
deduction is allowed during the basis period (instead of over five
years) in which the expenditure is incurred for procuring
environmental protection installations [including any part of
expenditure on environmental protection installation that remains
to be deducted (and is to be fully deducted) in the year of
assessment 2018/19].
- Expenditure on environment-friendly vehicle
- With effect from the year of assessment 2010/11, a full
deduction is allowed during the basis period in which the
expenditure is incurred.
Depreciation Allowances
- Industrial Buildings Allowances on Industrial Buildings and
Structures
- Initial allowance: 20% on the cost of construction of the
premises
- Annual allowance: 4% on the cost of construction of the
premises
- Balancing allowance or charge will be due upon disposal of the
premises
- Commercial Buildings Allowances on Commercial Buildings and
Structures
- Annual allowance: 4% on the cost of construction of the
premises
- Balancing allowance or charge will be due upon disposal of the
premises
- Plant and Machinery
- Initial allowance: 60% on the cost
- Annual allowance: at rates of 10%, 20% or 30% as prescribed by
the Board of Inland Revenue in the Inland Revenue Rules, on the
reducing value of the asset. Items qualifying for the same rate of
annual allowance are grouped under one "pool".
- A balancing allowance is available only on cessation of a
business to which there is no successor. A balancing charge can,
however, arise whenever the disposal proceeds of one or more assets
exceed the reducing value of the whole "pool" of assets to which
the disposed items belong.
Donations
Charitable donations made to approved charitable institutions or
trusts of a public character or to the Government of the Hong Kong
Special Administrative Region, amounting in aggregate not less than
$100 but not exceeding 35% (10% for years of assessment up to and
including 2002/03; and 25% for years of assessment 2003/04 to
2007/08) of the adjusted assessable profits before deduction of
donations, are allowable for deduction in computing the assessable
profits.
More information:
- Specified Rate of Interest for the Purposes of Section 16(2)(b)
of the IRO
- Approved Institutes under Section 16B and 16C of IRO
- Stock Exchanges and Major Financial Centres outside Hong
Kong
- FAQ: Keyman Insurance Policy
- DIPN 5 (Revised) : Profits tax deductions
- DIPN 49 (Part A) : Profits tax deduction of capital expenditure
on relevant intellectual property rights
- FAQ : Tax Deduction for Environment-friendly Vehicles
answer 2
The carrying on business in Hong Kong, and if so, how assessable
profits could be determined
The proposa 1 was accepted, because of set up a subsidiary in
Hong Kong, which will buy the goods from the Company and sell them
in Hong Kong via retail outlets. All transactions are conducted at
arm’s length.
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