What are the “deductible items” for profits tax? What other “exempt income”?

Hong Kong’s tax benefits are well-known all over the world. As a business owner, you can enjoy many tax benefits. However, if you do not understand the taxation scope of the Hong Kong Profits Tax, you may miss some deductible sums in vain, which will increase your tax burden.

Should all income be included in the tax return? Are there any deductions that can be made? The following refers to the latest government information on money opening to sort out the tax for the proprietor.

According to Hong Kong’s “Inland Revenue Ordinance”, regardless of whether a person is a resident in Hong Kong or not, if it is a business operating in Hong Kong, the profits (excluding the sale of assets) are subject to taxation.

What amounts are “business income”?

Profits tax is calculated on taxable profits, excluding “deductible expenses” and “tax-exempt income” discussed in the next section, and which income is considered “business income” in the regulations?

There are some incomes that may be ignored and will be treated as business income for profits tax purposes. The following are compiled from government sources:

• Payments received for the use of any patent, design, trademark, copyright in Hong Kong;

• related fees paid for performances performed in Hong Kong;

• Payments in the form of grants, allowances, or similar assistance for business operations in Hong Kong;

• Payments received in the form of leases, rents, etc. for movable properties used in Hong Kong.

What payments are “exempt income”?

For the purposes of the Inland Revenue Ordinance, some “exempt incomes” are collated from government information, which means that the following amounts are generally not included in assessable profits:

• dividends paid by the corporation;

• Taxable profits received from other taxable profits taxable persons;

• Tax Reserve Certificates interest;

• Interest and profits on bonds issued under the Loan Ordinance;

• Exchange Fund Debit Notes/Multilateral Agency Hong Kong Dollar Debit Notes, interest, and profits distributed;

• Long-term debt instruments, interest, and profits earned;

• any monies received by a specified investment scheme (where the recipient is a mutual fund, unit trust, or similar investment scheme)

• Deposit interest from authorized institutions in Hong Kong;

• Interest and profits on RMB government bonds after the year of assessment 2009/10.

What kinds of payments are “tax-deductible”?

Like personal salaries tax, business operators also have deductible expenses and payments. These payments include the purchase of machinery, computer accessories, etc., which can be deducted in equal installments over 5 years from the actual payment.

In general, expenses related to ordinary business can be deducted, including:

• Expenses for business premises rent, utilities, etc.;

• Costs, repair costs, replacement costs of business-related machinery or equipment;

• Bad debts or distressed claims;

• contributions to MPF schemes made by employees;

• Mandatory MPF contributions to self-employed persons;

• Severance or long service payments;

In addition, the government also provides the following deductible funds to promote environmental protection policies and even encourage enterprises to do more charitable activities:

• The purchase of environmentally friendly machinery, installations, and even environmentally friendly vehicles can be deducted in whole or in part during the base period of assessment;

• Depreciation allowance for machinery and industry: 60% of the cost in the initial period, the depreciation rate after the period is determined by the Tax Commission.

• Allowance for industrial buildings: 20% of the construction cost at the initial stage and 4% annually thereafter.

• Allowance for commercial buildings: an annual allowance of 4% of the construction cost.

• Donations of not less than $100 (but not exceeding 35% of Adjusted Assessable Profits) to recognized charities or governments.

Conversely, certain expenses that are not generally considered tax-deductible, although frequently appearing in business accounts, including the following:

• household or personal expenses;

• capital losses or withdrawn expenses;

• Recoveries from insurance plans or contracts of indemnity;

• Non-business related building rent or related expenses;

• Remuneration, interest paid to proprietors or their spouses, partners or their spouses; or contributions to their MPF schemes.

• Building renovation expenses, etc.

The above information is for reference only. If you have any questions about Profits Tax filing and tax deductions, we welcome your inquiries.