Hong Kong's Guide to Holding Over Provisional Tax
The tax system in Hong Kong is simple and attractive, but making the most of it requires knowledge of it. This guide looks at holding over provisional tax, which can help when things are tough financially or when income is low. We'll go into detail on provisional tax, why it would be beneficial to hold over, and how to handle the process efficiently.
What is Provisional Tax?
Based on the income from the prior year, Hong Kong's provisional tax system permits projected tax payments to be made at any time during the year. When it comes time to file taxes, the Inland Revenue Department (IRD) helps prevent big lump sum payments by collecting taxes gradually. Salaries Tax and Provisional Salaries Tax are normally paid in two installments: 25% by April and 75% by January following a minimum of nine months of revenue. This system keeps taxpayers' year-end tax payments manageable while generating consistent government revenue. There are fines for underpayment or late payments.
Who Needs to Pay Provisional Tax?
Provisional tax applies to two main types of taxes in Hong Kong: salaries tax and profits tax.
- Salaries Tax: In Hong Kong, employment income, which includes commissions, bonuses, wages, and other work-related earnings, is subject to this tax. Provisional salary tax installments apply to it.
- Profits Tax: Based on the money these companies make in Hong Kong, this tax is directed at their net earnings. It includes limited businesses, partnerships, and sole proprietorships.
Holding Over Provisional Tax
Under some circumstances, eligible taxpayers may postpone paying all or a portion of their provisional taxes, which can help manage cash flow in times of financial difficulty or anticipated decreases in income. For instance, deferring provisional tax can offer financial comfort amid a downturn in the economy or a job move those results in a large pay decrease.
Difference Between Tax Holdover and Tax Relief / Tax Reduction
Postponing provisional taxes does not equate to lower or no taxes. While delaying merely buys you more time to pay the taxes you owe, tax relief lowers your overall tax bill.
Eligibility for Holding Over Provisional Tax in Hong Kong
The IRD permits delaying all or a portion of your provisional tax payments associated with your salary tax assessment, using salary tax as an example. Based on your entire salary income in Hong Kong—including employment, pensions, and director's fees—this assessment determines your tax liability. Your estimated net chargeable income for the current year, after permissible costs and tax allowances, is the crucial component. The following year's tax year begins on April 1 and ends on March 31.
The 90% Rule
Your net chargeable income for the current year must be at least 10% less than it was for the prior year in order to be eligible for holding over provisional tax. Your expected income for 2024–2025 should be less than 90% of your net chargeable income for 2023–2024, for example, if that was HKD 100,000. The IRD may also take extraordinary events into account, such as job changes, business downturns, or unforeseen costs that affect your ability to pay.
Prism Consultancy can assist individuals and businesses in Hong Kong navigate holding over provisional tax by:
- Expert Guidance: Prism Consultancy can help clients understand the nuances of provisional tax and provide tailored advice based on individual or business circumstances.
- Financial Relief: During periods of financial hardship or significant income drops, Prism Consultancy can assist in the process of deferring provisional tax payments, alleviating cash flow issues.
- Comprehensive Assessments: By evaluating projected net chargeable income and applying for the deferral when appropriate, Prism Consultancy ensures compliance and optimizes tax management.
- Professional Services: With expertise in company incorporation and professional consultancy, Prism Consultancy can provide holistic support to foreigners working in Hong Kong, covering all aspects of tax and immigration requirements.
In essence, Prism Consultancy offers the expertise needed to make informed decisions and handle the administrative processes efficiently, ensuring clients make the most of Hong Kong's tax system benefits.