Provisional tax is a tax obligation that enables taxpayers to prepay their tax for the following year in installments, using past data on their income and profits to calculate the projected value of their provisional tax.
In this article, we’ll go over how the provisional tax is calculated, when each installment is paid, and what happens if your actual tax is higher or lower than projected (holdover provisional tax).
How does provisional tax differ from actual tax?
It bears underscoring that provisional tax is not double charged taxes for the current fiscal year, as is commonly misinterpreted. Rather, provisional tax is paying for taxes for the following year, and should be seen as a measure that spreads out the taxpayer’s obligation over the fiscal year instead of one burdensome lump-sum.
Newly incorporated companies, having no history of income or profits, will not be charged with provisional tax for their first year.
How is provisional tax calculated?
Provisional tax is a prepaid tax separately applied to profits tax, salaries tax, and property tax, calculated based on your previous year’s tax liability, including reported salary, profits, and property asset values. To use an example:
Let’s assume that for the year 2023/24:
- You paid HK$50,000 in salaries tax,
- HK$30,000 in profits tax, and
- HK$20,000 in property tax
These values will project the provisional tax for the year for the year 2024/25, and be split into installments of 75% and 25% respectively. Note that the provisional tax each of the tax types are calculated, and paid, separately.
| Tax Type | 1st Installment (75%) | 2nd Installment (25%) | Total Provisional Tax |
| Salaries Tax | HK$ 37,500 | HK$ 12,500 | HK$ 50,000 |
| Profits Tax | HK$ 22,500 | HK$ 7,500 | HK$ 30,000 |
| Property Tax | HK$ 15,000 | HK$ 5,000 | HK$ 20,000 |
| Total | HK$ 75,000 | HK$ 25,000 | HK$ 100,000 |
The first instalment is typically due in January, while the second instalment is due in April.
What happens if my actual tax is higher or lower than my provisional tax?
If your actual tax turns out to be more or less than your paid provisional tax, you will either get a refund or have to pay the difference at the end of the fiscal year. Using the salaries tax example:
Scenario 1: Actual Salaries Tax is Higher
- Actual Salaries Tax assessed for 2024/25: HK$ 55,000
- Provisional tax paid: HK$ 50,000
HK$ 55,000 – HK$ 50,000 = HK$ 5,000
You will receive an invoice to pay an additional HK$ 5,000 to the Inland Revenue Department after the final assessment.
Scenario 2: Actual Salaries Tax is Lower
- Actual Salaries Tax assessed for 2024/25: HK$ 45,000
- Provisional tax paid: HK$ 50,000
Difference = HK$ 50,000 – HK$ 45,000 = HK$ 5,000
You will receive a refund of HK$ 5,000 from the Inland Revenue Department.
What is a holdover for provisional tax?
Since provisional taxes are based on the current year’s income data, if your income drastically changes for the worse due to change in employment or a poor year of sales, you can apply for a holdover of any type of provisional tax when you meet the criteria, supported by documented evidence. A holdover for provisional tax means that you can defer eligible tax payments to a later date. You may apply for holdover 28 days before payment is due, or 14 days after receiving your tax invoice.
| Tax Type | Grounds for Holdover | Supporting Documents Required |
| Salaries Tax | New allowances (child, dependent parent), income dropped by 10% or more, objection to previous assessment | Details of allowances, income estimates, objection |
| Profits Tax | Assessable profits dropped by 10% or more of previous year, omitted losses, ceased business, elected to do personal assessment, objection | Draft accounts (≥ 8 months), business cessation proof |
| Property Tax | Assessable value dropped by 10% or more of previous year, ceased property ownership | Rental income details, ownership cessation proof |
How to apply for holdover provisional tax?
Aside from preparing supporting documents to back up your claim, you will also need to complete Form IR1121 and submit it physically or electronically to the IRD. Keep in mind that you will have to apply one copy of IR1121 for each tax type you are applying for holdover.
Conclusion
Provisional taxes are a way to spread out your obligatory tax duty in a more digestible manner. If you aren’t sure about whether you should apply for a holdover due to your unique circumstances, get in touch with us to help look over your financial situation.
