The answer first
Hong Kong collects provisional tax in advance for the current year, normally based on the profits (or income) assessed for the previous year. It is then credited against the final tax when the following year's assessment is made. For a profitable new company, the first assessment can be a surprise: it often includes the final tax for the first period and provisional tax for the next.
Provisional tax is usually paid in two instalments, roughly 75% and 25%. You can apply to hold it over on specified grounds, such as profits expected to fall below 90% of the previous year, within strict time limits.
At a glance
- Based on
- Usually the previous year's assessable profits
- Instalments
- About 75%, then 25% about three months later
- Credited
- Against the final tax for the year it relates to
- Holdover deadline
- 28 days before the due date, or 14 days after the notice, whichever is later
How it works
| Step | What happens |
|---|---|
| Assessment | The notice of assessment shows final tax for the past year and provisional tax for the current year |
| First instalment | Usually about 75% of provisional tax, combined with any final tax due |
| Second instalment | Usually the remaining 25%, about three months later |
| Next year | Provisional tax paid is credited against the final tax for that year |
Key takeawaySet aside tax as profits are earned. In the first assessment, a company can face final tax and provisional tax together, often almost double what it expected.
Holding over provisional tax
| Ground (examples) | In brief |
|---|---|
| Lower profits | Assessable profits for the year are expected to be less than 90% of the previous year's |
| Ceased business | The business has ceased or will cease during the year |
| Losses | Losses are expected that reduce the year's profits |
| Other specified grounds | As set out by the Inland Revenue Department |
DeadlineApply in writing not later than 28 days before the due date for payment, or 14 days after the date of the notice, whichever is later. Late applications are only accepted in limited circumstances. Supporting evidence, such as management accounts, is required.
Practical points
- Base holdover applications on reliable figures; if the year turns out better than estimated, the difference becomes payable.
- Tax reserve certificates can be used to save for tax payments.
- Instalment arrangements may be possible in cases of genuine hardship, by application.
- Late payment attracts surcharges and recovery action.
Self-check: where do you stand?
| Question | What to do |
|---|---|
| Do you set aside tax as profits are earned? | If not, open a tax reserve or separate account |
| Do you know when your next instalments fall due? | Check your notice of assessment |
| Will profits fall below 90% of last year? | Consider a holdover application in time |
| Are management accounts available to support an application? | If not, prepare them |
How DBMS Global can help
- Checking assessments and calculating provisional tax.
- Preparing holdover applications within the time limits.
- Cash planning for tax payments.
In summary
- Provisional tax is paid in advance, usually 75% then 25%.
- It is credited against next year's final tax.
- Hold over only on valid grounds, on time.
Official references
- Inland Revenue Ordinance (Cap. 112), section 63H
- Inland Revenue Department: FAQ on holdover of provisional tax, www.ird.gov.hk