How do I apply to hold over provisional tax in Hong Kong

How Do I Apply to Hold Over Provisional Tax

File Form IR1121 with the Inland Revenue Department before the provisional tax payment is due. State the grounds for your application on the form. The Department will issue a revised notice of assessment if it accepts your application.

Hong Kong Provisional Tax Holdover

Provisional tax is the IRD's mechanism to collect the coming year's estimated tax in advance. It is charged alongside the final tax for the preceding year of assessment. Because the amount is based on the previous year's assessable profits, a taxpayer whose current year profits are expected to fall may request a holdover of provisional tax.

The holdover applies to profits tax, salaries tax and property tax. The same Form IR1121 is used for all three heads.

Form IR1121 Application

The application is made on Form IR1121, which is available on the Inland Revenue Department website. The form requires:

• the taxpayer's name, tax file number and the year of assessment concerned
• the amount of provisional tax assessed and the amount the applicant considers should be held over
• the ground for the application, selected from the statutory reasons listed on the form
• a signed declaration

The form may be submitted by the taxpayer directly or by a tax representative acting on the taxpayer's behalf. Where a tax representative is appointed, the IRD generally communicates through the Tax Representative Portal.

IRD Provisional Tax Relief

The Inland Revenue Department will grant relief only if the taxpayer can show that the assessable profits for the current year of assessment will be less than the preceding year's profits on which the provisional tax was calculated, or less than 90% of those profits in the case of a taxpayer who has ceased or is about to cease the source of income.

The statutory grounds for holding over provisional tax are set out in the Inland Revenue Ordinance. They include:

• the taxpayer's assessable profits for the current year are or are likely to be less than those of the preceding year
• the taxpayer has ceased or will cease to derive assessable profits during the current year
• the taxpayer has made an election for two-tiered rates that was not taken into account in the assessment
• the taxpayer has claimed an offshore profits deduction that has not yet been allowed
• the taxpayer has incurred or will incur a loss in the current year

Each ground must be supported by an estimate. The IRD will not accept a bare assertion.

Holdover Provisional Tax Reasons

The most common reason for a holdover application is an expected drop in assessable profits. For example, a company whose trading income has fallen in the current basis period may use Form IR1121 to defer part of the provisional tax that was calculated on the higher profits of the previous year.

Other acceptable reasons include:

• a change in the basis period that affects the computation of assessable profits
• a capital allowance claim or balancing charge that was not reflected in the original assessment
• a tax loss carried back from a subsequent year under the loss carry-back rules

The IRD does not accept cash flow difficulty or a pending tax appeal as a standalone reason for relief.

Tax Reserve Certificate Option

If the IRD does not approve a full holdover, a taxpayer may buy a Tax Reserve Certificate (TRC) to set funds aside for the provisional tax payment. A TRC earns interest at a rate set by the Secretary for Financial Services and the Treasury. The certificate may be used to pay the tax when it falls due. The interest is treated as income and is assessable.

Using a TRC does not reduce the tax liability. It is a cash management tool for taxpayers who expect to have the funds available later but prefer to spread the cash outflow.

Deadlines and Procedure

Form IR1121 must reach the Inland Revenue Department before the later of: - 28 days before the due date for payment of provisional tax shown on the notice of assessment, or - 14 days after the date of the notice of assessment.

If the application is submitted late, the IRD may still consider it but will require a written explanation for the delay.

The IRD will issue a revised notice of assessment if it approves the holdover. The taxpayer must pay the reduced amount by the original due date shown on the initial notice, unless the revised notice extends the time. If the IRD rejects the application, the original payment remains due and interest will accrue on any shortfall.