Gross margin, markup, and net margin after company profits tax.
Net margin after tax
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Gross margin
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Markup over cost
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Profit before tax
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Profits tax
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Your breakdown
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Three numbers founders confuse, and why it costs them
Margin and markup get used as if they mean the same thing, and the mix-up quietly erodes pricing. Gross margin is gross profit as a share of the selling price, so it answers "how much of what the customer pays is profit". Markup is gross profit as a share of cost, so it answers "how much did I add on top of what I paid". Those are different denominators, which is why the same dollar of profit always shows a smaller margin than markup. A product bought for $600 and sold for $1,000 carries a 40 percent margin but a 67 percent markup. Net margin is the one that pays your rent: profit after operating expenses and after Hong Kong company profits tax, divided by revenue. This tool reports all three so you can quote a markup to a supplier conversation while still tracking the margin that keeps the business alive.
How Hong Kong tax shapes the bottom line
Hong Kong is gentle on a trading business. There is no sales tax or VAT to collect and remit, no tax on dividends you later pay yourself, and no capital gains tax if you eventually sell the company. What remains is profits tax on assessable profit, charged on a two-tiered scale. As modelled here for an incorporated company, that is 8.25 percent on the first $2 million of profit and 16.5 percent on anything above. An unincorporated business uses half those rates. Because the calculator applies the company rates, a small firm whose whole profit sits under $2 million is taxed entirely at 8.25 percent, which is why net margin stays close to pre-tax margin. These are the rates this calculator applies for 2025/26; confirm the current tiers and threshold with the Inland Revenue Department, since the two-tiered benefit is also restricted to one entity within a connected group.
From $1 million of revenue to take-home margin
Use the defaults: revenue of $1,000,000, cost of goods sold of $600,000, and operating expenses of $200,000. Gross profit is $400,000, so gross margin is 40 percent and markup over cost is 66.7 percent. Subtracting operating expenses leaves a profit before tax of $200,000. Because that sits below the $2 million threshold, profits tax at 8.25 percent is $16,500, leaving $183,500 of net profit. Net margin after tax is 18.35 percent. The gap between the 40 percent gross margin and the 18 percent net margin is almost entirely operating expenses, not tax, which is the realisation most founders need.
A pricing tip and the mistake to avoid
If you want a target gross margin, do not simply add that percentage to cost. To hit a 40 percent margin you divide cost by 0.6, which means a 66.7 percent markup, not a 40 percent one. Pricing off the wrong figure is the single most common way a Hong Kong retailer or services firm undershoots its target. The edge case to watch is the moment your profit before tax crosses $2 million. From that point the marginal rate doubles to 16.5 percent, so a strong year does carry a higher tax bite on the slice above the threshold, even though the first $2 million stays cheap. The calculator handles that step automatically once your numbers cross it.
Questions sellers ask
Should operating expenses sit above or below the gross margin line?
Below. Gross margin deliberately excludes operating expenses so you can see the profitability of the product itself, isolated from rent, salaries and marketing. Net margin then layers operating expenses and tax back in. Keeping them separate lets you tell whether a thin bottom line is a product problem or an overhead problem, which call for very different fixes.
Does Hong Kong tax the profit before or after my expenses?
After. Profits tax is charged on assessable profit, which is revenue less the costs incurred in earning it, including cost of goods and allowable operating expenses. The tool taxes profit before tax, not revenue, which is why a high-expense business pays far less than its top line might suggest. Capital expenditure is treated differently through depreciation allowances, so check those rules with the IRD for assets like equipment.