Hong Kong Profits Tax: Rates, Basis Periods, Filing, and Three Common Misconceptions

At a glance

Rates, thresholds, deadlines and deduction rules are governed by the Inland Revenue Ordinance and the IRD’s latest published guidance.

Who pays profits tax?

Three conditions must all hold:

1. You carry on a trade, profession or business in Hong Kong
2. The profits arise in or derive from Hong Kong
3. The profits are not capital in nature (capital gains are generally not taxed)

Typical chargeable income: trading income, service fees, commissions, and rental income where it is part of the business.

The second condition is the distinctive part of the Hong Kong system — and the most disputed. The test is what you did to earn the money and where you did it, not where the customer sits and certainly not which bank received the payment. See how an offshore claim is made and substantiated.

How does the basis period map to the year of assessment?

The year of assessment runs 1 April to 31 March.

The rule is: the accounting period ending within that year of assessment is the basis period for it.

So if your year end is 31 December, the accounting period ending 31 December 2026 falls into the 2026/27 year of assessment.

A new company’s first accounting period may exceed 12 months — up to 18. See filing your first tax return.

How is the tax calculated?

In layers under the two-tiered regime, not at a single rate on the whole amount.

A company with assessable profits of HK$3,000,000 for 2026/27:

One important restriction: among connected entities, only one may claim the two-tiered rates. An owner with more than one company has to nominate which — and if you do not, the IRD may decide for you. How the nomination works and which entity to choose: see the two-tiered rates.

The filing process

1. The IRD issues the return (BIR51 for companies, BIR52 for unincorporated businesses)
2. You submit it with audited financial statements and a tax computation
3. The IRD raises an assessment and issues a demand note
4. You pay the profits tax plus provisional tax for the following year

Two things to watch:

The deadline is not the same for everyone. Normally one month from the date of issue — but with a tax representative appointed you can use the block extension scheme, and the extended date depends on your year end, coded N / D / M.

The first bill covers two years at once. The assessment for the year plus provisional tax for the next. Provisional tax is not an extra charge — it is set off the following year — but the cash flow impact is real. See what provisional tax is, and when it can be held over.

What is deductible?

The general principle: expenses incurred in the production of chargeable profits are deductible.

Common deductible items:

• Rent and rates
• Staff costs and employer MPF contributions (subject to a cap)
• Specific bad debts that have been identified
• Depreciation allowances
• Qualifying R&D expenditure — 300% on the first HK$2,000,000, 200% on the balance
• Approved charitable donations — capped at 35% of adjusted assessable profits

Expressly not deductible: private and domestic expenses, capital expenditure, sums recoverable under insurance, and the tax itself.

Three common misconceptions

1. “No income means no filing.”

Wrong. If a return is issued, it must be filed — you can report nil. Not filing triggers an estimated assessment.

2. “Overseas income is always exempt.”

Not necessarily. Beyond having to substantiate the source in the first place, the foreign-sourced income exemption (FSIE) regime in force since January 2023 imposes conditions on specified foreign-sourced passive income received by multinational entities — interest, dividends, disposal gains on equity interests, and IP income — and from January 2024 it was extended to disposal gains on other assets.

3. “Profits tax is 16.5% of turnover.”

Wrong. It is charged on assessable profits — turnover less deductible expenses — and then in two bands.

What if you make a loss?

Losses can be carried forward indefinitely and set against future profits of the same trade. But Hong Kong does not allow a carry-back for a refund, and there is no group loss relief — a profit in one company cannot be offset by a loss in another.

The audit for a loss year matters more than most people think: that figure is the evidence for the relief you will claim later. See how losses carry forward.

One plain truth

Profits tax itself is not complicated. What is hard is knowing roughly what you will earn before the year ends.

Because almost everything you can actually do about it — the salary and dividend mix, the timing of capital expenditure, donations — has to be decided within the year. Once the year is closed and you finally see the numbers, the only remaining option is to compute the tax.

That is the practical case for keeping the books monthly.

Worth noting too: profits tax is not the only one an owner meets — salaries tax applies if you draw a salary, and property tax if you collect rent. All three are covered in the SME tax guide.

Want someone to run this year’s actual numbers with you? Talk to us, or get started.

This article is general information and does not constitute tax advice. Rates, thresholds, deadlines, deduction rules and the FSIE regime are governed by the Inland Revenue Ordinance, the IRD’s Departmental Interpretation and Practice Notes and its latest published guidance.