In Hong Kong, expenses that are used to generate taxable profits and are not capital in nature are usually classified as tax deductible expenses, which is an advantage of doing business in Hong Kong. However, some fees and expenses of Hong Kong companies are subject to special tax deductibility rules and may be tax deductible for everything from company equipment to staff expenses. By taking full advantage of this tax environment, it is generally possible for a company to take advantage of its financial planning and expand its business more easily. What business expenses are deductible? In this article, we explore, using the example of a car crash claim.
Which company expenses are tax deductible?
In Hong Kong, all company expenses and expenditure are deductible for tax purposes under section 16 of the Inland Revenue Ordinance, provided that they are incurred for the purpose of producing chargeable profits. In addition, a certain percentage of the head office’s administrative expenses in Hong Kong may be transferred for tax deduction in Hong Kong, provided that the expenses are incurred in producing chargeable income in the basis period of that year of assessment.
The following are some examples of fees or expenses that are deductible for tax purposes.
Firstly, expenses relating to borrowings, and also rental expenses, including the use of a building or land to generate taxable profits.
Also deductible are foreign taxes (subject to foreign taxation) if they are paid on income.
written-off bad debts, costs incurred in the repair, refurbishment and replacement of machinery, equipment and premises, and the cost of registered trade marks and patents are all deductible expenses
Retirement scheme contributions, expenditure relating to research and development, fees relating to technical education, charitable donations to recognised charities, and expenses incurred in the purchase of patents, trade mark registrations, copyrights and registered design rights are also tax deductible.
Finally, capital expenditure on certain fixed assets and environmentally friendly machinery is also deductible expenditure.
What company expenses are not tax deductible?
Generally speaking, expenses incurred to generate business income are deductible before tax. However, there are certain expenses that are not deductible under the Hong Kong Inland Revenue Department’s rules. These expenses include
-Private or self-incurred expenses, such as household expenses or personal spending.
-Expenses that do not generate a profit, such as marketing activities that do not generate economic benefits for the business.
-costs incurred in upgrading assets or property, such as carrying out fixed asset improvements or expansions
-amounts recoverable under an indemnity insurance contract, such as the cost of being covered by insurance.
any costs on which tax has been paid, other than employees’ salaries tax.
-certain capital expenditure or losses under section 17 of the Hong Kong Inland Revenue Ordinance, such as loss of investment in the acquisition of equity in a business.
-Expenses paid to or for the benefit of a spouse or partner, such as personal expenses of a spouse.
-Expenditure on property that is not related to the company’s profitability, for example, where the property is used for purposes other than the company’s profitability.
Therefore, it is important to note that the above listed expenses are not deductible for tax purposes.
Example: Can I deduct the compensation for a car crash?
Again, under the rules of the Hong Kong Inland Revenue Department, compensation expenses relating to car accidents are not normally considered deductible expenses as they are not business related and are not “expenses incurred for the purpose of earning assessable profits”. The only exception to this is if the collision occurred in the course of a business transportation or logistics activity, then the related costs may be considered a business expense and deductible. If in any doubt, you are advised to consult a tax professional for more precise information.
The above information is provided for your reference. If you have any queries or information on tax returns (personal tax returns, corporate tax returns, accountant tax returns), you are welcome to contact our professional advisors and we will provide you with a free quotation and consultation service in due course.