Guide of Tax Deductible Expenses for Hong Kong Company
In Hong Kong, expenses incurred for producing profits chargeable to tax and that are not capital in nature are generally categorised as the tax-deductible expenses. There are special rules for deduction of certain expenses (for example, interest expenses) and special tax relief is available for certain capital expenditure for Hong Kong Company.
Tax Deductible Expenses for Hong Kong Companies: Definition and Basic Rules
1. Deductible Expenses
The Section 16 (Ascertainment of chargeable profits) of Inland Revenue Ordinance (“I.R.O.”) has stipulated that all outgoings and expenses of a company, which they have been incurred by the taxpayer in the production of chargeable profits, are tax deductible.
A transfer of a certain portion of allowable head office administrative expenses (by means of a charge to a local branch or subsidiary in Hong Kong) is allowed as a deduction for Hong Kong tax purposes. Please note that the expenses must be the expenses incurred during the basis period for the year of assessment in the production of profits chargeable to tax.
The following expenses are tax deductible:
- Expenses connected with lending money
- Rental – for occupying buildings or land to generate taxable profits
- Foreign taxes paid on income (subject to foreign tax)
- Bad debt which has been written off
- Expenses incurred for repair, refurbishment, and replacement of machinery, equipment, and premises
- Cost incurred for trademark and patent registration
- Retirement scheme contributions (subject to certain limitations)
- Expenses related to research and development
- Fees related to technical education
- Charitable donations made to approved charitable institutions
- Expenses incurred in the purchase of patents, registration of trademarks, copyrights, and registration of designs
- Capital expense on prescribed fixed assets (subject to limitations) and environmental protection machinery
2. Non-deductible Expenses
In general, expenses incurred for the production of business income are tax deductible. However, according to the Inland Revenue Department of Hong Kong, the following expenses are not tax deductible:
- Private or domestic
- Expenses that were not incurred in the production of profits
- Cost incurred of making asset or property improvement
- Sums recoverable under insurance contracts of indemnity
- Any tax paid except employees’ salaries tax
- Certain capital expenses or losses that are defined as “non-deductible” as stipulated in Sec 17 of the Hong Kong Inland Revenue Ordinance
- Payments to (or for the benefit of) spouses or partners
- Expenses related to premises that were not occupied for profit-generating purposes
Tax-Deductible Expenses: Auditor’s Approach
If you intend to claim certain expenses against your tax, it is advisable that you bring this up to discuss with your tax accountant. The auditor will actually assess whether the expenses (amount and nature of the expense) booked by the company are reasonable and justifiable to be tax-deductible expenses.
Risks of Over-claiming
In the event of over-claiming, i.e. someone attempts to make too many claims of too many expenses as well as claiming non-business related expenses, the auditor would ask for justifications and evidence to support such claim. If the company fails to provide the information requested, the auditor may include an opinion stating that the company could not provide such information in the audit report. Such remarks will bring negative impacts to the company to apply for financing (e.g. bank loan). However, in general, expenses that can be clearly connected to business operations may be considered as tax-deductible, a company should have all proper explanations and supporting documents/proofs to evidence such expenses.