Hong Kong company: discover how to minimize your taxable income

Despite Hong Kong's attractive tax environment, business owners cannot completely avoid paying taxes. But how are businesses taxed, and what types of taxes are they subject to? For small business owners who have established or are considering establishing a business in Hong Kong, it is essential to work on tax optimization strategies in order to pay as little tax as possible. This article provides an overview of the obligations, taxable profits of established companies, tax allowances, and various exemptions your business may benefit from if you start operating in Hong Kong.

What income is taxable in Hong Kong?

If you decide to establish your business and start operating in Hong Kong, you must bear in mind that your income will be subject to tax. The main taxable income sources for SMEs registered in Hong Kong are:

• Income generated from business activities;
• Remuneration received as an employee of the organization.

Any entity registered in Hong Kong is required to pay corporate tax, or more precisely, profits tax. This means that small business owners must pay tax on their profits, not on their personal income. Revenue means the money earned from selling products or providing services. In other words, revenue is equal to sales. For example, if you have a shoe store and earn HK$1,000 per month, this amount will be considered your income.

What is the corporate tax rate?

Hong Kong currently applies two different tax rates to small businesses:

1. 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.
2. Two-tier corporate tax structure: the two-tier corporate tax system takes a different approach, as businesses are subject to a rate of 8.25% on the first two million Hong Kong dollars, after which they must pay a levy of 16.5% on any additional profits. The purpose 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 activities may be deducted from your taxes. For example, if the computer software used for work has reached its expiration date, replacing it could be a tax-deductible expense. When buyers submit their orders, this software is used to process them efficiently. All expenses that contribute to generating a profit and do not require major investments are tax-deductible. Below is a list of some expenses that are allowed and not allowed for tax deductions:

Expenses allowed for tax deductions

• Interest expenses, such as interest paid on a loan;
• Rent 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;
• Renovation of buildings;
• Capital expenditure on prescribed fixed assets and environmental protection machinery;
• Research and development expenses;
• Royalties and service fees paid to affiliated foreign companies;
• Expenses incurred for purchasing patents, registering trademarks, copyrights, and registering designs;
• Contributions to a retirement scheme. These will be subject to certain limitations;
• Charitable donations.

Expenses not allowed for tax deductions

• Domestic or private expenses unrelated to the business;
• Capital losses;
• Expenses incurred to improve your property;
• Any amount recoverable under insurance or an indemnity contract;
• Rental income or expenses unrelated to business activities;
• Taxes paid on corporate profits;
• Interest paid to a foreign beneficiary;
• Organizational and start-up expenses;
• Cost of acquiring goodwill;
• Fines and penalties.

Are there tax reductions for small businesses in Hong Kong?

In May 2021, the Financial Secretary proposed a one-off 100% reduction in profits tax, salaries tax, and personal assessment tax for the 2020/2021 year of assessment, subject to a maximum of HK$10,000. This means that small organizations will benefit from tax relief on their income. For salaries tax, a limit will apply to each individual. Better still, business owners who are separately assessed for profits tax and salaries tax may benefit from a tax deduction for both types of tax.

How can I reduce my Hong Kong small business's taxable income?

Here are some ways to reduce your taxable income:

• Calculate your total taxable income;
• Deduct allowable expenses;
• Deduct the value of unused items;
• Deduct donations made;
• Subtract your capital allowances;

Total taxable income is the net profit you have earned at the end of the financial period. This income must come from any business in Hong Kong, the rental of movable property, interest income, and grants.

Our support

Our firm has been based in Hong Kong since 1998 and offers tailored support for setting up and managing your company. We also act as your company secretary, a mandatory role for all companies in Hong Kong. The company secretary acts solely as a representative before the authorities and does not interfere in any way with the management of your business. For more information, please contact us at support@merritt.group.