Hong Kong Tax and Accounting: The Director's Guide

Running a Hong Kong company and not entirely sure what the tax and accounting rules ask of you?

Most directors work it out as they go, and that's fine right up until it isn't. A missed filing, a misunderstood exemption, or records that don't meet IRD standards can cost far more than getting it right would have.

This is the whole picture in one place, with links out to the detail on each part.

What makes Hong Kong different

Hong Kong uses a territorial tax system. You only pay tax on profits arising in or derived from Hong Kong.

So income earned entirely outside Hong Kong can be exempt from profits tax. For founders building international businesses, that's one of the most favourable arrangements anywhere.

But territorial doesn't mean paperwork-free. Every company still has to file returns, keep proper accounts and meet its Companies Ordinance obligations.

The headline facts:

• Standard profits tax rate: 16.5% for corporations
• Two-tier rate: 8.25% on the first HKD 2 million of assessable profits
• Salaries tax standard rate: 15%
• No VAT, GST, capital gains tax, or withholding tax on dividends

Profits tax

This is the main tax your company pays, charged on assessable profits arising in or derived from Hong Kong.

The two-tier system means most small businesses pay 8.25% on their first HKD 2 million. One restriction catches people: only one entity per associated group can use the lower rate. I regularly see holding and operating companies both trying to claim it, and the IRD disallows one. Get the structure right at the start and you avoid years of unpicking.

Your financial year end drives your filing deadlines. Most companies choose 31 March, 31 December or 30 June. The IRD issues returns annually and you typically get one month to lodge, though extensions are available through the block lodgment system.

There's more detail in the corporate tax rate guide and the profits tax return guide.

The offshore income exemption

If your company earns profits outside Hong Kong, those profits may not be taxable here.

To claim it you have to show the profits genuinely arose outside Hong Kong. The IRD looks at where contracts are negotiated and executed, where services are performed, and where goods change hands.

One director earned 70% of his revenue from offshore clients but made every decision in Hong Kong. The IRD disallowed most of his claims, correctly, because the substance of the business was here.

Since January 2023 the FSIE regime has added rules for passive income. Active trade income is still governed by the ordinary territorial principle.

Take proper advice before making a claim. The documentation requirements are substantial, and a weak claim is worse than no claim at all. The offshore exemption guide goes through the tests.

Your accounting obligations

Every Hong Kong company must keep proper books of account. That's a legal requirement under the Companies Ordinance, not just good practice.

Your accounts have to give a true and fair view, be prepared under Hong Kong Financial Reporting Standards, be audited annually by a practising CPA, and be kept for at least seven years.

Even a dormant company usually still goes through the process unless it qualifies for a specific exemption. See the accounting requirements guide and the audit guide.

The deadlines that matter

• Employer's return (BIR56A): 30 April every year
• Profits tax return: issued by the IRD, typically one month to lodge
• Annual return (NAR1): 42 days after your incorporation anniversary, to the Companies Registry
• Property tax return: if the company owns Hong Kong property

The annual return goes to a completely different body from the tax returns, and confusing the two is a common way to miss one.

One warning that comes up constantly: companies miss the April deadline because the return went to an outdated registered address and the director never knew it existed. By the time anyone notices, the IRD has often estimated profits for two years. Keep your registered address current, and make sure whoever holds it forwards your post.

Salaries tax

If you pay yourself or anyone else a salary, you have obligations here.

Employers file the annual BIR56A by 30 April, reporting the income of every employee above the reporting threshold. The IRD then issues tax demands directly to each employee, because there's no PAYE deduction in Hong Kong.

Directors count as employees for this. A founder paid himself a director's fee without realising it had to go on the BIR56A. Two years later the IRD came calling and he filed back returns, paid additional tax and took penalties.

MPF contributions are compulsory too. Employer and employee each contribute 5% of relevant income, capped at HKD 1,500 a month each. The salaries tax guide covers the whole thing.

Stamp duty

Duty applies when shares change hands or property is transferred.

Share transfers are 0.2% of the consideration or net asset value, whichever is higher, split equally between buyer and seller. Property attracts ad valorem duty at tiered rates.

The "whichever is higher" part matters. I advised a founder about to pay duty on his stated consideration when his net asset value, which included significant property, made the true dutiable amount about three times larger. A quick adjudication with the Stamp Office saved him from understamping and the penalties that follow. More in the stamp duty guide.

The mistakes directors actually make

• Losing accounting records, or not keeping them in a usable format
• Missing the employer's return deadline in April
• Assuming offshore income is automatically exempt without any documentation
• Not updating the registered address when it changes
• Filing the profits tax return late because the original notice was never seen

A decent accountant flags all of these before they become problems. Waiting until the IRD makes contact is always more expensive.

When to get someone involved

Some of this is genuinely simple. Some of it isn't, even when it looks it.

Get professional help if you're claiming an offshore income exemption, if you have related-party transactions, if you employ people in more than one jurisdiction, if you're buying, selling or restructuring shares or assets, or if you've had an IRD query or assessment you disagree with.

The short version

Hong Kong has one of the simplest and most competitive tax systems anywhere. Simple doesn't mean effortless though. Every company still has to file, comply and keep proper records.

The directors who stay out of trouble treat accounting as something that runs all year, not a scramble every spring. Get someone good early, keep the records current, and ask questions before problems develop rather than after.

Common questions

What's the profits tax rate?

16.5% for corporations, with the first HKD 2 million of assessable profits at 8.25% under the two-tier system. Only one entity per associated group gets the lower rate.

Do I file if the company made no profit?

Yes. You still file a profits tax return even with a loss or no taxable profits, including your accounts and a computation showing nil liability.

How long do I keep records?

At least seven years, covering accounting records, invoices, receipts, bank statements and other financial documents.

Is offshore income always tax-free?

No, not automatically. You have to show the profits arose outside Hong Kong, and the IRD examines where contracts were negotiated, where work was done and where decisions were made.

Does my company need an audit?

Yes. Almost all Hong Kong companies must have accounts audited annually by a Hong Kong practising CPA, with limited exemptions for dormant companies.

When is the employer's return due?

By 30 April each year, reporting all employees earning above the threshold. Late filing carries penalties.

What if I miss a profits tax deadline?

The IRD can penalise you, estimate your profits and raise an additional assessment. Objecting requires formal documentation within one month.