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Profit tax

Profit tax

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Profits tax in Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...

 is Direct tax
Direct tax
The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed.-General meaning:In the general sense, a direct tax is one paid directly to the government by the persons on whom it is imposed...

 and also classified into Income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...

.

According to Cap 112 Hong Kong Ordinance - Inland Reveue Ordinance (in short, IRO) Section 14, unless otherwise provided, profits tax shall be charged at the standard rate on any person who carries on a trade, profession or business in Hong Kong and assessable profits arising in or derived from Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...

 for a year of assessment.

Tax computation


The formula is:
HK profits tax payable = Net assessable profit × Profits tax standard rate

Net assessable profit = Assessable profit − Loss brought forward (if any) + Loss transferred from partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...

 (if any)

Assessable profit = Profit or (Loss) per financial account + (Disallowable expenses charged in account − Non-taxable income credited in account) − Depreciation allowances − Approved charitable donations

Approved charitable donations


The Approved charitable donations are limited to 10% of the amount after deducting of the Depreciation allowances, per IRO Section 16D. And after the amendment recently, it is changed to 25% of the amount after deduction of Depreciation allowances

Profit Taxpayer


The term person includes corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...

, partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...

, trustee
Trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...

 and sole properiter and so on.

Year of Assessment


The period of assessment mostly is from 1 April to 31 March of the following year, but it is up to taxpayer's wish with reasonable excuse. The example is financial year of the business.

Section 14

  • A person carries on a trade, a profession or a business in Hong Kong
  • There are profits arising in or derived from (trade, profession, business). Profit is not from the sales of capital assets
  • The profits must be arising in or derived from Hong Kong
    • Contract effected test
    • Operation test
    • Provision of credit test
    • Development test or registration test

Badges of Trade


Any trade may be subject to profit tax unless a reasonable man can provide evidence to proof that there is not any revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

 profit. In Hong Kong, capital profit is not subject to tax.

In order to prove the nature of a trade, the badges of trade are to be considered:
  1. the taxpayer's intention of profit (one acquisition of the commodity)
  2. Subject Matter of the commodity disposal (If enjoyment can be assume on original acquisition, e.g. rental)
  3. the length of ownership,
  4. frequency of similar transactions,
  5. reason for disposal,
  6. supplementary work and so on.

See also

  • Inland Revenue Department (Hong Kong)
    Inland Revenue Department (Hong Kong)
    The Inland Revenue Department of Hong Kong Government is one of Hong Kong government departments which is responsible for the administration of the following Hong Kong ordinances on taxes and duties and the related rules and regulations:Betting Duty Ordinance Cap.108Business Registration...

  • IRO Section 5 Property tax
    Property tax
    A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...

  • IRO Section 8 Salaries tax
    Salaries tax
    Salaries tax in the Hong Kong taxation system is direct tax and also classified as income tax.According to Cap.112 Hong Kong Ordinance, Inland Revenue Ordinance IRO Section 8, unless otherwise provided, salaries tax is chargeable on income from any office, employment and pensions for a year of...


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