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Profits Tax - Partnership

First, please read tax tips:  business registration  and  keep business records  

Section 14 of Inland Revenue Ordinance levies profits tax on a person carrying on a trade, a business or a profession in Hong Kong in respect of his profits derived from Hong Kong. Section 2 defines “person” to include a partnership. Section 22 empowers the Revenue to issue a profits tax assessment on a partnership. 

Normally, the precedent partner is responsible to file a Profits Tax Return (BIR 52) for every year of assessment.  According to Section 2, “precedent partner” is the one first named in the partnership agreement. If there is no such agreement, he will be the first named in the usual partnership name or in any statutory document such as Business Registration Certificate. 

If the precedent partner fails to file the tax return or to do any acts required by the Ordinance (including payment of tax), every partner will be jointly and severally liable to do it (including payment of the outstanding tax of the precedent or other partners). 

The tax return must be supported by the following:

  1.  a certified copy of audited Balance Sheet and Profit and Loss Account;

  2.  a tax computation showing how the Assessable Profits are computed from the accounting profits; 

  3.  a schedule showing he allocation of Assessable Profits between partners, taking into account any salaries payable to partners, and balance apportioned in their profit and loss sharing ratio;

  4.  schedules of the following items (where applicable):

  •  mandatory contributions made under the Mandatory Provident Fund Schemes Ordinance in respect of each partners;

  •  capital expenditure incurred, capital assets sold, depreciation charged in the accounts and assets not in use at the end of the basis period;

  •  details of expenditure incurred on, and disposal proceeds of, scientific research;

  •  details of expenditure incurred on refurbishment of buildings --- the location and the usage of building during the year;

  •  details of the bad debts written off and provided for including the name of debtors and reasons therefor;

  •  details of any service / management fee received including name and address of each payer,

  •  details of interest paid or payable, including name and address of the lender, any security to the lender, and the usage of the loan;

  •  details of income claimed to be with a non-Hong Kong source;

  •  details showing the name and address of payments involving contractor / sub-contractor fees, management fees,  commission, royalties, legal and other professional fees, and hiring charges for the use of a movable property in Hong Kong;

  •  details of bad debt provisions and write-offs;

  •  details of change in valuation of stock; and

  •  details of rent payments including name and address of the landlord, the property location, the total rent paid and the period covered.

What is a partnership                     合夥業務

A single Profits Tax assessment is issued to the partnership. The tax payable is computed at the standard rate 15% (from 2008/09 onward) on the assessable profits. However, if a partner elects for Personal Assessment and such election can reduce his total tax liabilities, then allocation of profits or losses will have to be made so that his share of profits will be transferred to Personal Assessment and will not be taxed under Profits Tax. 

If a partner is a corporation, its share of profits will be taxed at the corporation rate 16.5%.

If there is a change of partners e.g. death of partner or retirement of a partner, or admission of a new partner, the change should be reported to Business Registration Office within one month of the change.  For profits tax purpose, so long as at least one partner remains before and after the change, the partnership is regarded as going on --- there will be no change of business registration number for such partnership. Allocation of profits or losses should be made for the period before the change and after the change during the basis period of the year of assessment.

Normally, the Revenue will issue the first tax return about 18 months after a person  registers his business.  But if he has assessable profits for the year of commencement, he should inform the Revenue within 4 months after that year of assessment. In other words, if  he started a business on 1 April 2007 and made profits in the year ended 31 March 2008, he should inform the Revenue of his chargeability not later than 31 July 2008.

The Ordinance does not require a taxpayer to appoint a tax representative to act on his behalf or hire a professional accountant to prepare the final accounts. But if the business is big, it is advisable for him to seek professional advice.

Allocation of profits or losses between partners

 

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