Audit and tax filing services are essential to businesses operating in Hong Kong. The audit requirements of Companies Ordinance (CO) impose strict standards on the financial reporting of all incorporated companies in Hong Kong, while taxation under the Inland Revenue Ordinance ensures that businesses pay their fair share of taxes.
This article aims to provide a comprehensive overview of audit and tax filing services in Hong Kong. It will cover audit requirements under the Companies Ordinance, an overview of taxation in Hong Kong, types of taxation applicable in Hong Kong, when is tax due, and what documents are required for tax filing.
- Overview of taxation in Hong Kong
- Types of taxation applicable in Hong Kong
- When is tax due in Hong Kong?
- Which of the Tax forms Should fill and submit to the Inland Revenue Department?
- Overview of Audit in Hong Kong
Overview of Taxation in Hong Kong
Hong Kong has a very simple and competitive tax regime when compared to other countries. Hong Kong’s assessment year runs from 1 April to 31 March of the following year. Generally, Hong Kong applies 3 main types of tax that residents may be liable for
- Salaries Tax
- Profits Tax
- Property Tax
Hong Kong follows a territorial tax system where only profit from trade, business and profession arising in or derived from Hong Kong is taxed.
Hong Kong does not apply the following types of tax listed below:
- No value added tax in Hong Kong.
- No Capital Gains Tax in Hong Kong .
- No tax on Dividend in Hong Kong
Types of Taxation Applicable in Hong Kong
Salaries Tax in Hong Kong
Salaries Tax is levied on persons with respect to income arising from or derived from Hong Kong. Both Hong Kong residents and non-residents may be liable to Salaries tax depending on conditions surrounding their employment and number of days in Hong Kong.
The following group of people are excluded from Hong Kong salaries tax:
- Renders of service outside Hong Kong
- If part of your income has been tax in another territory
- Capital gains are not taxed in Hong Kong
- Income from visits to Hong Kong are less than 60 days (for non-Hong Kong employments)
The following highlights payments received by employees in Hong Kong which are not taxable
- Personal gifts from Employers are not taxable
- Severance payment are not taxable
- Loan from the employer to the employee at a reduced rate compared to the market rate is not taxable
- Club benefits, recreational facilities provided by the employer to the employee are not taxable.
Housing Benefit provided by the Employer to the Employee increases the total income by a certain percentage, depending on the type of accommodation provided to the employee. The table below summarizes the % increase in total income:
60 Days Rule for Hong Kong Employment
- Tax exemption applies to persons who have not provided any service in Hong Kong. Once a person with Hong Kong employment, who is a Hong Kong resident (not a visitor) renders service in Hong Kong, all the income received during the assessment period becomes liable to Hong Kong’s salary tax.
- If the individual has a hOng Kong employment, renders service in Hong Kong, but is regarded as a visitor, and has not spent up to 60 days in Hong Kong, all the income received during the assessment period is tax exempt.
- If the individual has a hOng Kong employment, renders service in Hong Kong, but is regarded as a visitor, and has spent more than 60 days in Hong Kong, all the income received during the assessment period is subject to Hong Kong tax
60 Days Rule for a Non-Hong Kong employment
- For a Non- Hong Kong employment, Tax exemption applies to persons who have not provided any service in Hong Kong. Once a person with a non-Hong Kong employment, who is a Hong Kong resident (not a visitor) renders service in Hong Kong, the income received during the assessment period is apportioned based on the times spent in Hong Kong and taxed accordingly. Day of arrival and departure is counted as 1 day.
- If the individual has a non-Hong Kong employment, renders service in Hong Kong, but is regarded as a visitor, and has not spent up to 60 days in Hong Kong, all the income received during the assessment period is tax exempt.
- If the individual has a non-Hong Kong employment, renders service in Hong Kong, but is regarded as a visitor, and has spent more than 60 days in Hong Kong, the income received during the assessment period is apportioned based on the times spent in Hong Kong and taxed accordingly. Day of arrival and departure is counted as 1 day.
For prevention of double taxation, Hong Kong residents can claim tax credit if tax has been paid in another jurisdiction with an existing double tax arrangement with Hong Kong. If the jurisdiction where an Hong kOng Resident has paid tax in has nop dulbe tax agreement with Hong Kong, then a tax exemption can be claimed in Hong Kong.
Non residents can seek exemption and relief in their country of residency.
Salary tax rates are on a progressive basis. The more you earn, the higher the tax rate.
Profit Tax in Hong Kong
Profit tax is the tax charged to persons who carry out trade, business or profession In Hong Kong and have assessable profit from the business activities carried out in Hong Kong. An entity can be said to be carrying on Business in Hong Kong if:
- The businesses central management and control is in Hong Kong.
- If the business is carried out through an agent in Hong Kong.
- If the contract for sales and purchase is carried out in Hong Kong.
- If the company’s operations are carried out in Hong Kong.
- If the transactions that give rise to assessable profit arise and derived from Hong Kong
The following receipts are exempted from profit tax according to the Inland Reveune Ordinance.
- Capital receipts: Proceeds from the sale of capital assets are excluded from tax payers assessable profit.
- Interest Income: Interest Income from deposit place with an authorized institution in Hong Kong is exempt from profit tax.
- Dividends: Dividends received from a corporation already chargeable to profit tax are not chargeable to profit tax in Hong Kong.
- Interest Income from a tax reserve certificate issued by the commissioner of Inland Revenue Department is not assessable to tax.
Profit tax (for businesses) is charged in 2 tiers. Companies with chargeable profit of HK$2,000,00 and below have a 50% discount to the standard tax rate. The below table summarizes this.
If a business which has been newly incorporated has accessible profit after its fiscal year-end (say 31 March 2022), it must notify the Inland Revenue of its chargeability to profit tax within 4 months from its fiscal year end, if your company has not received the profit tax return form. The table below compares examples for fiscal year-end date and deadline to notify the Inland revenue of chargeable profit.
For Hong Kong salaries and property tax, the reporting period follows 1 April each year to 31 March of the following year. Thus, notification of chargeability should be made on or before the 31st of July if tax return form has not been received.
Profit Tax in Hong Kong
Property tax is chargeable to owners of land or/and buildings situated in Hong Kong. Non residents of Hong Kong who own property in Hong Kong are subject to tax regardless of their country of residency.
Exemption from Property Tax:
- The Hong Kong Government is exempt from Property tax.
- Land or building which are used as consular premises/embassies are exempted from property tax.
- A corporation which pays profit tax on the proceeds received from property owned is exempt from property tax.
- A corporation which owns a property and occupies the property, using it for the purpose of producing profit is not chargeable to profit tax on the property.
- Approved Charitable bodies and trust of a public character are exempt from property tax.
Tax deductions are not provided for the following items for receipts from land or building rented in Hong Kong:
- Capital expenditure on loan/ building are not deductible
- Agency fees paid to property agents are not deductible
- Management fees paid by the tenant or landlord are not deductible
- Rates paid to the authorities when rent is irrecoverable is not deductible
- Rates paid to the government when there is no rental income is non deductible.
Property tax is computed at a standard rate of 15% on the assessable value of the land or building after deducting 20% statutory deductions and rates paid by the landlord.
When is Tax Due in Hong Kong?
- The period for tax demand by the Inland Revenue depends on the company’s basis period for financial reporting. The table below summarizes the basis period, tax reporting deadline and estimated time to receive a demand note from the Inland Revenue Department.
| Basis period | Annual Tax reporting deadline (Companies without tax representatives) | Annual Tax reporting deadline (Companies with tax representatives) | Estimated time to receive tax demand letter from the Inland Revenue department |
|---|---|---|---|
| 1 April – 30 November (Accounting Date Code “N) | 2nd May Annually | 2nd May Annually except there is a block extension during the assessment year | This varies among different companies but in general, the date to receive the tax demand letter falls between November in the year the tax return form is issued to April of the following year. |
| 1 December – 31 December (Accounting Date Code “D”) | 15 August Annually except there is a block extension during the assessment year | ||
| 1 January – 31 March (Accounting Date Code “M”) | 15 November Annually except there is a block extension during the assessment year |
- For Hong Kong salaries and property tax, the reporting period follows 1 April each year to 31 March of the following year. Thus, notification of chargeability should be made on or before the 31st of July if tax return form has not been received. Tax reporting is due 1 month from the issue date of the tax return form..
Which of the Tax forms Should fill and submit to the Inland Revenue Department?
- For sole proprietorships businesses, tax reporting should be made in Part 5 of your Individuals Tax Return form (BIR60). For small business (gross income less than HK$2,000,000), NO OTHER INFORMATION is required to be submitted along with the BIR60 form. For businesses other than small businesses, a certified financial statement including the balance sheet, income statement, and supporting schedules used to calculate the declared profit or loss are required to be submitted to the Inland Revenue department.
- For Partnership businesses, the financial information should NOT be reported in the Part5 of the salary tax form (BIR60). The financial information should be reported in the Profits Tax Return for Persons Other Than Corporations (BIR52). This form can be requested from the Inland revenue if this has not already been issued to your company after 18 months of incorporation. An audited financial statement is NOT required but a certified financial statement should be prepared along with the tax computation for the period. All financial information used to prepare the financial statement must be kept properly as they may be requested by the department in certain circumstances.
- A corporation which pays profit tax on the proceeds received from property owned is exempt from property tax.
- For corporations, Profits Tax Return form – Corporations (BIR51) needs to be filled and submitted along with the audited report of the corporation and tax return form. The audit must be performed by a qualified auditor according to the Hong Kong Reporting Standards (HKFRS).
Overview of Audit in Hong Kong
Under the Companies Ordinance (CO), all incorporated companies must submit audited financial statements every year to comply with audit requirements. The audit requirements set out by the audit regulator in Hong Kong aim to improve transparency and accuracy of financial reporting. This includes an independent audit opinion on the company’s annual financial statements, reports on any material changes in accounting policies or practices, and a review of internal control systems.
Who can be exempted from Preparing an Audit report in Hong Kong
Limited companies with active business operations need to prepare and submit their audited financial statement and profit tax return form annually. This will be submitted to the Hong Kong Inland Revenue Department for tax computation and issuance of tax demand notes.
Dormant companies with no active operation are exempted from preparing an audit report until they cease dormancy.
What is the price range to prepare an audit report in Hong Kong?
There is no standard price range for audit service in Hong Kong. The consideration for fixing a fee for audit service includes:
- Business size
- Total revenue for the financial year
- Size of the balance sheet
- Number of investments held by the company during the financial year
- The use of digital currencies and products like Crypto and Blockchain products
The larger the size of the above considerations, the higher the audit fee.
Conclusion
Audit and tax filing services in Hong Kong are essential for businesses operating here; audit requirements are set out by the audit regulator to improve transparency and accuracy of financial reporting, while taxation is based on ‘territorial source principle’.
Companies must submit audited financial statements when filing their Profits Tax returns and individuals must file Salaries Tax within 1 month from the issue date of the salaries tax return form.
Audit and tax filing requirements are complex; as such it is important for businesses in Hong Kong to ensure they seek the necessary professional advice to ensure compliance with audit and tax regulations.