How do calculate profits tax for loss-making companies and “dormant” companies?

Hong Kong’s business environment is highly recognized by the outside world. One of the reasons is that Hong Kong’s profits tax system is simple and affordable, which is good news for many business owners who intend to develop in Hong Kong. When it comes to the profits tax declaration procedure, many people wonder if they still need to pay profits tax if the business loses money. In the case of a business that has not yet started and a “dormant” company, what should be paid attention to when filing tax returns? The following article will answer for you.

Do I have to pay profits tax this year?

According to the Inland Revenue Ordinance, if a business owner has a loss in the current year of assessment, you can choose to carry forward the current year’s loss to the next year to offset the business’s profits in subsequent years.

Also, in the case of corporations operating in more than one industry, they can use losses from one business to offset profits from another business. When the income or profit taxed at the preferential tax rate is calculated, a relative adjustment will be made when the profit or loss is offset against other income or profit.

In addition, if the loss-making business is a partnership business, each partner should share the profits and losses in proportion to the original agreement, and at the same time, depending on whether the partner is an individual or a corporation, for tax assessment.

Once the business owner/taxpayer has other income such as salaries from employment in the year of assessment in which the loss occurred, he or she can also choose to be assessed under “Personal Assessment”. Any losses incurred can be used to Set off against other taxable income (gross income). If there is still a loss balance after offsetting, you can still choose to include the loss balance in the “Personal Assessment” of the subsequent year in the next tax year, and then continue to offset the income for that year.

It is worth mentioning that taxpayers must be careful not to use any “fraudulent means” to evade tax liability, such as changing business accounts from profit to loss. Violators may be punished and held accountable for tax in accordance with the anti-tax avoidance provisions.

What about a business that has not yet started?

Many proprietors may set up a limited company first, but have not actually started their business, resulting in no profit for the year of assessment or the business has not started at all.

At this point, the taxpayer can report to the tax bureau that the business “has not started”. If the company director or company secretary provides the bureau with a business statement that the business has not started operation, you can file an audit report on the tax return without submitting an audit report. No business profits were reported for the year. Once the business is launched, the relevant financial statements need to be attached for subsequent years.

Do “dormant” companies have to pay profits tax?

According to the definition of the Inland Revenue Department, the so-called “dormant” company means that the Hong Kong limited company has no “significant accounting transactions” in the year of assessment there is no transaction in the company’s accounting records. “Transactions” are not limited to annual fees paid to the Hong Kong Companies Registry, and payments required to issue shares.

Having said that, even if a company meets the definition of a “dormant” company in the year of assessment, it does not mean that the company does not need to file a profits tax return on time to fulfill its due tax obligations. It’s just that “dormant companies” are not required to submit audited financial statements and tax calculations when filing tax returns.

The above information is for reference only. If you have any questions about tax declaration and accounting, we welcome your inquiries.