New to tax-deductible expenses in Hong Kong? We’ll guide you through what deductible expenses are for profit tax computation for Hong Kong companies.
Hong Kong companies are required by law to pay profit tax from profits derived from conducting business in Hong Kong. However, calculating the profit tax payable can be quite confusing, as it requires understanding the various components of profit and knowledge of whether an expense is deductible.
Knowing the type of deductible expenses available for your company is important to stay compliant with the corporate tax laws. Claiming expenses that are non-compliant with the Hong Kong tax requirements could result in a penalty of $10,000 plus 3x the amount of the undercharged tax.
This article will guide you on what qualifies as deductible expenses on profit tax computation for Hong Kong companies.
Deductible expenses are expenses incurred in the production of chargeable income.
“Capital allowance is a tax deduction claimable for the decline in value (depreciation) of capital assets, such as your investment property.” Source: blog.capitalclaims.com
Physical assets such as buildings and machinery naturally degrade over time, causing their value to drop. As such, a depreciation allowance lets you claim back a portion of the expense. These allowances fall under three categories:
Allowances on industrial structures and buildings, calculated as follows:
Allowances on commercial structures and buildings are calculated as follows:
Allowances on plant and machinery used in the company, calculated as follows:
Expenses incurred during research and development with effect from 1st April 2018. There are two types of qualifying R&D expenses, denoted as type A and type B expenditure.
Type A expenditure is any other R&D expenditure other than the expenses listed under Type B. For example, a payment to a foreign university for R&D activities related to your business.
Type B expenditures include
Type A expenditure qualifies for 100% deduction of the expenditure amount but is subject to certain conditions. Type B expenditure qualifies for a 300% deduction for the first HKD 2 million and 200% for the remaining amount.
Qualifying R&D activities are undertaken in Hong Kong. They include:
Qualifying R&D activities exclude:
Donations to approved trusts, Hong Kong government Special Administrative Region, or charitable institutions are deductible. The donated amount should be more than $100 but not more than 35% of assessable profits.
Expenditure on building refurbishments is deductible over a 5-year period in equal installments.
Expenditure on environmental protection facilities is deductible as follows:
Bad or doubtful debts are deductible if they are proven to have turned bad during the assessment period. The deduction is limited to debts included in assessable profits or debts related to money-lending business.
There is a special rule on reporting bad or doubtful debts for companies that use the fair value basis when filing profits tax that states that impairment loss is deductible if it’s credit-impaired.
If the bad or doubtful debts and impairment losses are recovered, they should be treated as taxable income for the year they were recovered.
Interest is only deductible if it was incurred in producing the company’s assessable profits. This means money borrowed to help fund activities or asset-producing profits.
There are limitations to application because the money has to be borrowed from a person or institution that is taxable in Hong Kong.
Mandatory and voluntary contributions to Mandatory Provident Fund-exempted and MPF schemes are deductible to a limit to 15% of the total employee emoluments.
Rent for premises or offices used in generating company profits is a deductible expense.
Any amount incurred when repairing company equipment or any other item used in production for profit is deductible.
Amounts paid as remuneration to company directors may be deducted.
Amounts payable or paid to foreign affiliates are deductible if they’re incurred when producing company profits.
Profit tax in Hong Kong is calculated based on adjusted assessable profits. The corporate tax liability is calculated by adjusting the assessable profits, as shown below.
Total assessable profits XXXX
Non-assessable profits XXXX
Deductible business expenses XXXX
Unutilized losses XXXX
Capital allowances XXXX (XXXX)
Add Balancing charges XXXX
Taxable income XXXX
The tax rate for corporate companies is two-tiered:
Let’s look at what is recognized as assessable profits, non-assessable profit, and unutilized losses.
In Hong Kong, assessable profits for a company include
Non-assessable profits include:
Operating losses incurred by a company should be carried forward to offset profits until they’re utilized, but they cannot be carried backward.
We’ve touched on deductible expenses, on the flip side, there are also non-deductible expenses, these include:
The Inland Revenue Department in Hong Kong issues profit tax returns every year on the first working day of April. Companies are expected to file tax returns one month after receiving the tax request.
The deadline can be extended as follows:
Computing profits tax in Hong Kong can be daunting, but it’s essential for all businesses.
By understanding the types of expenses that are deductible and non-deductible, you can ensure that you are taking full advantage of all available deductions.
Remember to keep good records and consult an accountant or tax specialist to ensure you take advantage of all the tax deductions available.