Does a company with business losses or no profit still need to pay tax?

Every business owner aspires for their venture to thrive; however, results sometimes fall short of expectations. If a company generates no profit and the accounts reflect a loss, how is the tax assessment handled?

In fact, taxpayers can carry forward the losses from the current year to the subsequent year to offset future profits. It is important to note that losses incurred in a partnership business are shared among partners according to their agreed profit-and-loss sharing ratio. These losses are then further assessed based on whether each partner is an individual or a corporation. (Special restrictions also apply to limited partnerships with more than 20 partners under Section 22B of the Inland Revenue Ordinance.)

Alternatively, if a taxpayer has other sources of income (such as employment salary) during the year of the loss, they may elect for Personal Assessment. This allows the business loss to be used to offset other taxable income. If a residual loss remains after the offset, the taxpayer can elect for Personal Assessment again in the following year to offset the remaining balance against that year’s income.

Finally, regardless of business performance, it is vital to retain most receipts for business expenses. By law, sufficient records of business income and expenditure must be kept for at least 7 years to determine assessable profits. Failure to maintain adequate business records can lead to prosecution, with a maximum fine of HK$100,000, and the Inland Revenue Department may issue an estimated assessment on the business.