What Expenses Are Tax Deductible for Hong Kong Companies?

At a glance

The conditions, caps, rates and specific provisions are as set out in the Inland Revenue Ordinance and in the IRD’s Departmental Interpretation and Practice Notes and most recent publications.

The principle is actually simple

The basic test in the Inland Revenue Ordinance: was the expense incurred in the production of assessable profits?

Expressly not deductible are:

• Domestic or private expenses
• Expenditure or loss of a capital nature (acquiring is capital; using is expenditure)
• Amounts recoverable under insurance or a contract of indemnity
• Tax itself

Nine tenths of the arguments are about the first two — “is this private or business?” and “is this capital or revenue?”

Where does the line fall in the grey areas?

Private car. Purely private use is not deductible. With business use, apportion on a reasonable basis — and “reasonable” needs support, such as a mileage log. Buying the car is capital expenditure, relieved through depreciation allowances rather than deducted in one go.

Home office. You can apportion rent and utilities by area or by time used, but the basis has to be one you can articulate. “About a third” with no records behind it will not survive being questioned.

Entertaining. Hong Kong has no equivalent of the US 50% restriction; business entertaining is generally fully deductible. But there have to be records — who you were with, what it was about, which business it related to. A single invoice reading “food and beverage”, with no context, becomes grey.

The owner’s own pay. A limited company’s director’s remuneration is deductible (with the director paying salaries tax on it); a sole proprietor’s payment “to himself” is not an expense and is not deductible — because the proprietor and the business are the same person.

Interest. This is the one people most often take for granted. The Ordinance imposes strict conditions on interest deductions (particularly where the borrower and the lender are connected), and it is not a case of “borrowed money, paid interest, therefore deductible”. Where shareholder loans or intra-group borrowing are involved, each case has to be looked at.

The enhanced-deduction categories that people miss

These give you more than you actually spent, and are worth particular attention:

R&D expenditure. For qualifying local R&D, the first HK$2,000,000 is deductible at 300%, the remainder at 200%. Spend HK$1m on qualifying R&D and it counts as HK$3m for tax. A technology company that does not know about this is simply giving it away.

Computer hardware, software and prescribed fixed assets. Generally a 100% immediate write-off, with no need to spread it over years.

Environmental protection facilities and vehicles. Likewise a 100% write-off.

Approved charitable donations. Deductible where the aggregate is not less than HK$100, capped at 35% of adjusted assessable profits. Note that it has to go to an approved charitable institution — giving to an individual or buying sponsorship advertising does not qualify.

The three places expenses most often get disallowed

One: no receipt. “I don’t remember” does not make it disappear — the IRD is entitled to ask you to prove it. An expense with no source document behind it stands a high chance of being disallowed. The same records are needed for the audit too.

Two: private expenses mixed into the company’s. Using the company card for personal items and then treating the lot as company expenditure at year end is the most common and the easiest to catch. The right approach is to separate them as they happen, not to sort it out afterwards.

Three: capital and revenue confused. Buying a machine, fitting out premises, buying a trade mark — these are not that year’s expenses, they are capital items with their own treatment. Deduct them as ordinary expenses and, repeated year after year, it accumulates into a large problem.

The real solution to this is in the day-to-day

By this point you may have noticed a pattern: most “is this deductible” questions are not answered at the moment of filing. They are answered by how you recorded the entry on the day.

Record it properly — who, when, why, with a receipt — and what is deductible stays deductible. Sort it out at year end and, even where it was deductible, it can be disallowed simply because it cannot be explained.

That is also the real difference in doing your own books versus using an accountant: not which one can do the arithmetic, but which one keeps the record.

Want someone to get your day-to-day expense classification right so you are not digging through receipts at filing time? Talk to us, or get started.

This is general information and does not constitute tax advice. Eligibility, caps, rates and the specific provisions are as set out in the Inland Revenue Ordinance and in the IRD’s Departmental Interpretation and Practice Notes and most recent publications; for the treatment of a particular expense, consult a professional.