How can SMEs legally reduce taxes? Three practical tips
3 mins read l Published: 4 Aug 2025 l Updated: 4 Aug 2025
As a Hong Kong SME owner, do you face a headache every year when filing your taxes, staring at a hefty profits tax bill and feeling lost as to what to do? Hong Kong's flexible tax system means you can effectively reduce your tax burden by mastering legal tax-saving techniques. This article, compiled by a team of accountants with 22 years of Hong Kong tax experience, share three practical tax reduction strategies to help you save tax legally and smoothly!
1. Make good use of tax allowances and deductions
Hong Kong's profits tax system uses a two-tiered rate system. The first HK$2,000,000 in profits is taxed at only 8.25%* (for limited companies), while the remaining amount is taxed at 16.5%. Therefore, businesses should rationally plan their income and expenses to keep their assessable profits in the lower tax brackets.
Tax-deductible expenses include:
✅ Employee salaries and MPF contributions
✅ Office rent, utilities
✅ Business-related advertising and marketing expenses
✅ Professional service fees (e.g., accounting, legal advisory)
✅ Qualifying business expenses for production of the assessable profit
Practical Tips:
Avoid mixing personal expenses into company accounts to avoid scrutiny by the Inland Revenue Department (IRD).
Keep all receipts for at least seven years to prepare for random audit by the IRD.
2. Utilize Directors' Remuneration and Company Dividends
Limited company owners can optimize their tax returns through Directors' Remuneration and Dividend Distributions:
Directors' Remuneration: Can be deducted from company profits but are subject to salaries tax (minimum 2% to maximum 15%).
Dividends: Can't be deducted from company profits. Hong Kong dividends are tax-free, but they can only be distributed after the company has generated a profit.
Practical Strategy:
If your personal income tax rate is lower than 16.5%, you can withdraw company profits through your salary and director’s remuneration. You can reduce your personal tax liability by enjoying your personal tax allowance, child tax allowance, dependent parent tax allowance, and more. If you choose personal assessment, you can also enjoy your spouse's unused personal tax allowance when your spouse has no salary income.
If your company has high profits, you can combine salaries and dividends to achieve the best tax outcomes.
3. Utilize the "offshore profits" exemption and tax treaties
Hong Kong adopts a "territorial source taxation" system. If your business profits are derived from overseas, you can apply for the offshore profits exemption and avoid paying Hong Kong profits tax.
Common qualifying situations:
✅ Goods trade: Both purchases and sales take place outside of Hong Kong.
✅ Service income: Neither your client nor your service provider is located in Hong Kong.
✅ Holding company: Passive income (such as dividends and capital gains) may be tax-exempt.
Practical tips:
You must provide complete business records (such as contracts and logistics documents) to prove the source of your profits.
The IRD has recently stepped up its scrutiny of "fake offshore" companies. It is recommended to seek an assessment from experienced tax accountant.
Summary: Legal Tax Reduction = Professional Advice + Planning ahead
Although Hong Kong's tax system is simple, there are still many opportunities for legal tax savings. SMEs should:
1. Maintain complete documentation to ensure all tax deductions are in compliance.
2. Choose an appropriate business structure.
3. Optimize salary and dividend mix to reduce overall tax burden.
4. Adjust fiscal year to improve cash flow.
5. Evaluate offshore business opportunities to secure tax exemptions.
Profit Accounting is a team of experienced accountants in Hong Kong specializing in tax planning, auditing, and company secretarial services for SMEs.
We have 22 years of practical experience and completed over a thousand successful cases to assist our clients in applying for "offshore profit" exemptions, helping them legally save tax and easily navigate Hong Kong tax challenges.
If you have questions about tax planning, consult with Profit Accounting's professional accountants to help you legally reduce your taxes!