Sforzando Profits Tax Guide 2021|Guidelines for Limited Profit Tax Reporting

Posted by SFZ Professional Services on February 16th, 2021

2021 Limited Profits Tax Reporting Guide

Accounting and tax administration are important in every country, and Hong Kong is no exception. Every Hong Kong company is required to submit an annual Profits Tax Return (PTR) when conducting business, which is issued by the Hong Kong Inland Revenue Department (IRD).

The company will need to organize company accounts and prepare to submit them to a certified public accountant for review and submission to the government. After the accounts are prepared and reviewed, the audit report and tax calculations will be submitted to the tax bureau together with the PTR.

Hong Kong Tax Year

Hong Kong’s tax year is a fiscal year beginning in April, not a calendar year from January to December. Since the Hong Kong fiscal year ends on March 31, the profits tax return uses the same pattern. Therefore, the 2017 (2016/17) profit tax return period is from April 1, 2016 to March 31, 2017.

For Hong Kong companies, you can choose the fiscal year end that suits you best, and then end according to Hong Kong's fiscal year. Therefore, if your company’s year-end date is December 31, 2016, these financial data will be used to fill in the company’s 2017 profits tax return. Any profit during the period from January 2017 to March 2017 will be included in the 2018 profits tax return. Even if the profit occurred within the Hong Kong fiscal year, it will also be included in the second year of your company's fiscal year ( (I.e. December) March 31, 2017).

Usually, a company only has one month to fill out and fill out this profits tax return, and then the IRD will issue a fine for late submission of this tax return. For the company's first profits tax return, the company can extend this filing for up to 3 months from the date of issuance, and can extend the tax return application to certain year-end dates, but it needs to apply for the extension once a year.

The dates for extending the profits tax declaration are as follows:

  • A. Fiscal year: as of March 31
  • B. Tax filing date: November 15
  • Documents to be reviewed: no later than September 1
  • Fiscal Year: As of December 31
  • Tax filing date: August 15
  • Documents to be reviewed: no later than June 1
  • The fiscal year end date is a date other than A. or B., for example, June 30
  • Tax filing date: April 30
  • Documents to be reviewed: no later than mid-February
  • First tax application

The company's first profits tax return is usually issued about 18 months after the company's incorporation date. For example, if a company is established on January 1, 2017, it will receive the government's first profits tax bill around June 2018.

During this period, if the company conducts business in Hong Kong or abroad, it needs to prepare accounts for the company. Even if the company does business outside of Hong Kong, it still needs to report its account and any profits made to IRD in its annual report in order to apply for profits tax exemption. If the company has a profit or loss during this period, it needs to complete a profit tax return. Then, the company will need to submit a complete PTR and supporting documents within three months from the date of issuance. The CPA can assist you in preparing audited financial statements and completing the company's profit tax return.

Zero return vs. tax-free profit

In Hong Kong, the effective operation of a simple tax system with low tax rates requires a high degree of compliance and understanding by taxpayers and enterprises. According to the law, every taxpayer is responsible for submitting accurate and timely tax returns to the Hong Kong Inland Revenue Department (IRD). It is often misunderstood that companies that do not carry out business activities in Hong Kong submit "NIL Profits Tax Return." This idea is wrong and could lead to further tax implications, severe tax penalties, and possibly court summons against future companies.

Companies can benefit from Hong Kong’s land tax system, and taxes are only levied on profits generated in Hong Kong and profits outside Hong Kong where the taxable income is zero, but they must first apply for profits tax exemption and obtain offshore company status . Offshore status will not be granted automatically, and the company should never assume that it will be granted when submitting the "NIL Profits Tax Return".

The Inland Revenue Ordinance (IRD) stipulates that punitive measures can be imposed on a person under section 80(2) of Part XIV without reasonable excuse:

  • Incorrect return
  • Make an incorrect statement;
  • Provide any incorrect information;
  • Unable to provide timely returns; or
  • Failure to inform the tax receivable;
  • The offense can be fined 10,000 Hong Kong dollars, and the under-collected tax will be tripled.

Sforzando Profits Tax and Hong Kong Professional Accounting Services can provide professional advice on these documents because we are experienced in properly handling the offshore status of "zero" PTR returns and profits tax exemption cases. If your company does not properly submit the "NIL Profits Tax Return" when conducting business activities outside of Hong Kong, Sforzando can help your company get back on track with the correct tax return.

Zero profits tax return

Companies that have not started any business transactions during the entire period may submit a "NIL Profits Tax Return". The business starts when the company starts its business activities. The exact business start date is not easy to determine, but generally speaking, business hours are activities related to the business.

If the company has not yet started any type of business, it can submit a "NIL Profits Tax Return" to declare that the company has not yet started any business activities. Filling in the PTR form as "NIL" actually means that the company does not conduct business in Hong Kong or any other place of the company.

If the company only conducts business and activities outside of Hong Kong, it can apply for offshore profits tax exemption. This is different from the "NIL Profits Tax Return" because the company stated that it has done business with the financial data filed in the PTR, but it is exempted from profits tax according to Hong Kong regulations. While submitting the audit report and profit tax return, apply for profit tax exemption.

This is an important step in recognizing that the company’s business activities are exempt from the company’s Hong Kong profits tax.

Note: If the tax return of a Hong Kong company is not submitted to the Inland Revenue Department before the deadline, it will be regarded as illegal and will be punished by the government.

Exemption from profits tax

If the Hong Kong business is operated entirely abroad, it is eligible for the profits tax exemption granted by the Hong Kong Inland Revenue Department.

This means that a 0% income tax rate is levied on company income from abroad, allowing the company to enjoy tax-free profits.

You can only enjoy this service if you have approved the application for exemption from profits tax. These are the things you need to do for this:

  • Submit PTR and audited financial statements
  • Submit offshore tax exemption requirements to audited financial statements
  • The Inland Revenue Department will issue an offshore claim inquiry letter to the company as proof
  • Company directors or sales representatives must provide their passports, sales representatives, company invoices, contracts, arrangements, transportation documents, etc. to IRD
  • After the verification is completed, the tax bureau will issue you tax exemption treatment

Note: The offshore tax allowance is only valid for offshore profits, and the maximum validity period is five years.

Is the company’s offshore income not taxable in Hong Kong?

Hong Kong establishes a geographical system for corporate tax arising in or derived from Hong Kong. This means that corporate tax only applies to trade, commercial or professional profits within Hong Kong. There is no corporate tax on profits from business activities conducted outside Hong Kong, regardless of whether the funds are remitted through Hong Kong or other territories. Therefore, a company whose funds go to a Hong Kong bank account but conduct transactions outside of Hong Kong may not be subject to corporate profits tax. On the other hand, a company whose funds go to an offshore bank account but trades in Hong Kong may be subject to corporate profits tax.

This territorial system also does not depend on whether you are a resident or a non-resident. You may be a resident of non-taxable profits from outside Hong Kong, or a non-resident with taxable profits in Hong Kong. The system mainly depends on whether the company's profits come from Hong Kong or from Hong Kong.

The question of whether the company conducts business in Hong Kong and whether its profits come from Hong Kong is basically a fact. Some guidance on the applicable principles can be found in cases that have been heard by Hong Kong courts and other legal cases.

Profits tax return information

The following is some other general information on the profits tax return:

  • Your company needs to submit a profit tax return once a year in accordance with the requirements of the IRD.
  • The first PTR will be released about 18 months after the establishment of the company, covering the first 18 months of the company.
  • Each subsequent profit tax return of the company will cover 12 months and should be submitted annually.
  • The profits tax return should be accompanied by supporting documents such as certified audit reports and tax calculations.
  • Precautions:
    • The first financial period of the business
    • It usually starts from the date of incorporation and up to 18 months after incorporation. The company should also choose a financial year end date. For example, if the company chooses a year that ends on March 31, each year after the first day of the new year will end on April 1 and the following March 31. All financial statements must be prepared within the current fiscal year.

For inquiries about profits tax services, please contact Sforzando profits tax and Hong Kong professional accounting services

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SFZ Professional Services
Joined: February 16th, 2021
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