Hong Kong tax rules are not very complicated. However, many people are confused when preparing their tax returns because there are not many guidelines around. In this series of articles, we will explain some key concepts and rules for Hong Kong taxes. In this part, we will focus on the profits tax.

To understand Hong Kong's profits tax, first you need to understand who are required to pay. Sole proprietorship businesses, whether they have business activities or not, are required to report their profits tax.

Partnerships of which you were a partner or sole proprietorship businesses which has changed to partnerships and vice versa during the year need not be reported in your tax return. Corporations of which you were a shareholder need not be reported in your tax return either.

You need to declare the profits / (losses) from the businesses, trades or careers for the basis period. "Basis period" means either the year ended 31 March during the relevant year of assessment or the annual accounts of the business made up to any date within the relevant year of assessment.

Below are some key concepts that you need to understand in profits tax.

Gross Income:

Gross income means all types of income, including ordinary business income, proceeds from sale of capital assets and other non-taxable receipts, whether or not derived from the principal activities.

Turnover:

Turnover includes amounts received / receivable from goods sold or services rendered.

Gross Profit / (Loss):

This is the amount of turnover after deducting cost of goods sold. For business not engaging sales of goods, enter '0' for this item in the tax return.

Assessable Profits / (Adjusted losses):

Assessable Profits / (adjusted losses) must be computed in accordance with the Inland Revenue Ordinance of Hong Kong. Add non-deductible expenses charged in the accounts to the net profit per account or deduct from the net loss to arrive at the assessable profits / adjusted losses. Salaries paid to, benefits received by the proprietor and his / her spouse, proprietor's domestic and private expenditure, capital expenditure and non-business expenses are not deductible.

For calculating profits tax, you can use the Performa Profits Tax Computation Form [IR957A (e)] provided by the Hong Kong Inland Revenue Department.

Above are some key concepts and rules related to Hong Kong's profits tax. If you are still confused, you can consult Hong Kong Government's website, which has a lot of useful resources for tax. Also, you might want to consider hiring a professional to prepare your tax.