Impact of epidemic relief measures on Hong Kong’s profits tax liability
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Written by Michael Wong, CPA
Reviewed by TAX.hk Editorial Team
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Business Tax Guide
The Impact of COVID-19 Relief Measures on Hong Kong Profits Tax Obligations
📋 Key Highlights
Key Takeaway 1: Most pandemic-era tax relief measures have ended, and businesses must comply with the standard tax rules for the 2024-25 year.
Key Takeaway 2: Under the current two-tiered profits tax rates regime: for corporations, the tax rate is 8.25% on the first HK$2 million of assessable profits and 16.5% thereafter; for unincorporated businesses, the tax rate is 7.5% on the first HK$2 million and 15% thereafter.
Key Takeaway 3: All records related to pandemic-era tax claims must be properly retained for at least 7 years for potential review by the Inland Revenue Department (IRD).
Remember the unprecedented impact Hong Kong businesses faced during the COVID-19 pandemic? At that time, the government swiftly rolled out temporary tax relief measures to provide breathing room for enterprises. Heading into 2024-25, how many of these emergency measures remain? And how should businesses handle the legacy tax issues left behind? This guide takes an in-depth look at the continuing impact of pandemic-era tax policies on your current profits tax obligations.
The Evolution of Hong Kong's Pandemic Tax Relief Measures
When COVID-19 hit Hong Kong in early 2020, the government adopted a phased response strategy, introducing tax relief measures to adapt to the evolving economic crisis. These measures were essentially temporary "lifelines" rather than permanent policy changes. Understanding this timeline is crucial for businesses still dealing with the aftermath of that extraordinary period.
Period
Economic Context
Tax Relief Focus
Early 2020
Initial shock, implementation of lockdown measures begins
Extension of relief measures, transitional arrangements
2023–2024
Post-pandemic normalization
Most relief measures ended, return to standard rules
⚠️ Important Note: Most COVID-19 tax relief measures have now ended. Businesses must comply with standard tax rules for 2024/25, including the two-tiered profits tax rates regime and ongoing compliance requirements.
During the peak of the pandemic, Hong Kong implemented several targeted relief measures that directly affected corporate profits tax liabilities. While these measures were temporary, understanding their mechanisms helps businesses address any remaining compliance issues.
Tax Payment Deferral: A Cash Flow "Lifeline"
As the most widely utilized relief measure, this allowed eligible businesses to defer tax payments, providing immediate cash flow relief during periods of reduced revenue. Businesses were required to demonstrate genuine financial hardship caused by the pandemic to qualify.
Special Pandemic-Related Deduction Items
The government previously introduced special deductions for pandemic-related business expenses, including:
Expenses on hygiene supplies and personal protective equipment (PPE)
Costs of premises alterations for social distancing purposes
Infrastructure and equipment required for work-from-home arrangements
Digital transformation costs incurred for remote operations
Sector-Specific Support Measures
Particularly hard-hit sectors such as retail, food and beverage, and tourism received targeted fee waivers and reductions. These measures were designed to provide immediate relief to the most vulnerable industries.
Relief Type
Impact on Profits Tax
Current Status (2024/25)
Tax Payment Deferral
Extended tax payment deadlines to improve cash flow
Ended - Standard payment deadlines apply
Special Deductions
Reduced assessable profits by claiming pandemic-related expenses
Ended - Standard deduction rules apply
Industry Fee Waivers
Provided targeted tax/fee relief for specific sectors
Calculating Adjusted Tax Liabilities in the Post-Pandemic Era
Businesses that utilised pandemic relief measures must ensure their tax calculations accurately reflect the relief claimed and their current obligations. This involves several key considerations.
Tax Treatment of Government Subsidies
Many businesses received government subsidies, such as the Employment Support Scheme. For Profits Tax purposes:
Subsidies used to compensate for loss of revenue are generally treated as taxable income
Grants used to reimburse specific expenses may be subject to different tax treatments
Accurate classification is crucial for proper tax reporting
Loss Carryforward Considerations
Hong Kong allows tax losses to be carried forward indefinitely to offset future profits of the same business. Businesses that sustained losses during the pandemic should:
Accurately document pandemic-year losses: Maintain detailed records to substantiate loss computations
Understand interactions with relief measures: Certain relief measures may have impacted loss calculations
Plan future utilisation: Strategically utilise losses to offset future assessable profits
💡 Pro Tip: Retain comprehensive records of all pandemic-related tax claims for at least 7 years. The Inland Revenue Department can raise additional assessments for up to 6 years (10 years in cases of fraud), making proper documentation vital for potential tax audits.
Although pandemic relief measures have concluded, their legacy presents ongoing compliance considerations for businesses in the 2024-25 tax environment.
Documentation and Record Keeping
Businesses must retain comprehensive records for 7 years, including:
Evidence supporting claims for pandemic relief
Detailed breakdowns of qualifying pandemic-related expenses
Records of government subsidies received and their tax treatments
Documentation supporting the calculation of losses in pandemic years
Adherence to Standardized Deadlines
With the conclusion of relief measures, enterprises must comply with standard tax deadlines:
Profits Tax Returns are typically issued in early May
Standard filing deadlines apply (generally about 1 month from the date of issue)
Provisional tax interest: 8.25% starting from July 2025
Different industries experienced unique challenges during the pandemic, leading to varying patterns in relief measure utilization and recovery trajectories.
Industry
Pandemic Impact
Relief Utilization
2024-25 Tax Focus
Retail and Hospitality
Severe - Social distancing, reduced consumption
High - Tax deferrals, specific deductions
Standard compliance, loss utilization
Financial Services
Moderate - Operational adaptation
Selective - Cash management
Foreign-Sourced Income Exemption (FSIE) compliance, international rules
As Hong Kong's economy stabilizes, enterprises must transition from crisis management to strategic tax planning that aligns with current regulations for 2024-25.
Optimizing Current Tax Positions
With standard rules reinstated, focus should be placed on:
Two-Tiered Profits Tax Rates: Corporations: 8.25% on the first HK$2 million of profits, and 16.5% on the remainder
Correct Expense Classification: Ensure all deductible expenses are properly claimed
Loss Utilization Planning: Strategically utilize pandemic-era losses to offset current profits
Embracing Digital Transformation
The pandemic has accelerated digital adoption. Leverage technology to:
Enhance Record Keeping: Use digital systems to meet the 7-year record retention requirement
Streamline Compliance Processes: Automate calculations and tax filing procedures
Real-Time Monitoring: Effectively track tax positions and statutory deadlines
💡 Professional Tip: Review your business structure annually. Only one entity within a connected group can enjoy the lower 8.25% tax rate on the first HK$2 million of profits. Strategic corporate structuring can optimize your overall tax position.
✅ Key Takeaways
Most COVID-19 tax relief measures have ended; businesses must adhere to standard tax rules for the 2024-25 year of assessment.
Comprehensive documentation for pandemic-related claims must be retained for at least 7 years.
Current Profits Tax rates: 8.25% on the first HK$2 million of profits for corporations, and 16.5% thereafter.
Strategically utilize pandemic-era losses to offset current assessable profits.
Ensure proper tax treatment for government subsidies received during the pandemic.
Adapt to new operating models and make corresponding adjustments for tax compliance.
The COVID-19 pandemic tested Hong Kong's tax system and the resilience of its businesses. While emergency relief measures provided vital support during extraordinary times, the focus must now return to complying with standard tax regulations for 2024-25. By understanding the lingering effects of pandemic-era policies and strategically planning for the new normal, businesses can navigate their tax obligations with confidence and position themselves for sustainable growth in Hong Kong's evolving economic landscape.
📚 Sources and References
The content of this article has been verified against official Hong Kong SAR Government information and authoritative sources:
Last updated: December 2024 | The information in this article is for general reference only. For specific questions, please consult a qualified tax professional.
