tax deduction allowances - HKWJ Tax Law

Tax Deductions, Allowances & Incentives in Hong Kong

Hong Kong tax system adopts low tax rates and is relatively straightforward and features certain types of tax deductions. Further, Hong Kong does not impose value added taxes or goods and services taxes. Under the Hong Kong Inland Revenue Ordinance (“IRO”), there are however three types of taxes charged:

  • Property Tax, which is charged on rental income derived from immovable properties located in Hong Kong;
  • Salaries Tax, which is charged on income arising in or derived from Hong Kong from any office, employment or pension; and
  • Profits Tax, which is charged on assessable profits derived from any trade, profession or business carried on in Hong Kong arising in or derived from Hong Kong.

In respect of the Property Tax, the available tax deductions are limited but include so-called government rates borne by the owner and an allowance for repairs and outgoings of 20% of the assessable value (i.e. the rental income) after deduction of the said rates.

On the other hand, for Profits Tax and Salaries Tax, there are a number of different tax deductions, allowances and incentives available depending on the circumstances of the taxpayer. As such, the tax deductions, allowances and incentives discussed below is limited to Profits Tax and Salaries Tax.

Tax Deduction on Profits Tax

For calculating one’s assessable profits, the starting point is the accounting profits prepared under the generally accepted accounting principles (“GAAP”) which will then be subject to statutory tax adjustments in accordance with the IRO.

Outgoings and expenses that are incurred in the production of assessable profits, other than those specifically disallowed, are tax deductible under the general deduction provisions of the IRO. Therefore, accrued expenses recognised under GAAP are tax deductible provided that they are revenue in nature and not specifically disallowed under the IRO.

The tax deduction of capital expenditure is subject to specific provisions of the IRO depending on the types of the asset / expenditure involved. A tax incentive is also provided for qualifying research and development expenditures.

For certain items of expenses (e.g. interest expense), there are special rules governing their tax deduction. Some common types of tax deductions as specified in the IRO are elaborated in more detail below.

Depreciation Allowance of Fixed Assets

Accounting depreciation as shown in the financial accounts are generally not tax-deductible. However, depreciations / capital allowances in relation to capital expenditure of fixed assets that are acquired for one’s production of assessable profits, are tax-deductible. Common types of these allowances:

  • Industrial buildings and structures: An initial allowance of 20% is granted in the year of acquisition for the capital expenditure on the construction of new industrial buildings and structures and an annual allowance of 4% is granted afterwards. For existing industrial buildings and structures, only annual allowance is available and the calculation basis thereof is different which depends on when such buildings and structures were firstly put in usage and how long they have been used for. Industrial buildings and structures meant those buildings and structures used for carrying on a qualifying trade e.g. manufacturing.
  • Commercial buildings and structures: An annual allowance of 4% is granted for capital expenditure on the construction of new commercial buildings and structures. The annual allowance for existing commercial buildings and structures is calculated differently which depends on when such buildings and structures were firstly put in usage and how long they had been used for. Buildings that are not qualified as industrial buildings and structures are commercial building and structures.
  • Refurbishment of non-domestic building or structure: Tax deduction of 20% on capital expenditure of the renovation and refurbishment of non-domestic buildings or structures can be claimed evenly over five years.
  • Plant and machinery: An initial allowance of 60% of the capital expenditure on plant and machinery is available for the year of acquisition and an annual allowance will be given in the year of acquisition and each of the subsequent years. Depending on the types of plant and machinery involved, the annual allowance rate is 10%, 20% or 30% on the written down value.
  • Computer hardware and equipment, manufacturing plant and machinery, environmental protection installation, environmental protection machinery or environment-friendly vehicle: Subject to meeting specified conditions, capital expenditure incurred on these types of assets can be fully deducted in the year of acquisition.

Intellectual Property

  • Patent rights and right to know-how: Subject to specific certain conditions, the acquisition cost of any parent rights or rights to any know-how can be fully deducted in the year of purchase.
  • Specified intellectual property rights: Capital expenditure incurred on copyright, performer’s economic right, protected layout-design (topography) right, protected plant variety right, registered design or registered trade mark can be deducted over 5 years in equal amount. A shorter period of time for deduction may be applicable under certain circumstances.

Due to the numerous anti-avoidance tax rules on intellectual property, besides considering tax deductions a company or individuals should be very cautious about intellectual property tax implications  and how to do proper tax planning.

Research & Development Expenditure

Research and development expenditure is often capital in nature and thus not allowable under the general deduction provisions of the IRO. However, there are specific provisions allowing tax deduction for research and development expenditure.

Subject to satisfying certain conditions, qualifying research and development will be entitled to 300% tax deduction for the first HKD 2 million and the remainder, without any cap, will be entitled to 200% tax deduction.

Other qualifying research and development expenditure (but not eligible for the enhanced deduction) will be entitled for a normal 100% deduction.

Director’s Fee & Employee’s Remuneration

Fees and other remunerations paid to directors / employees are generally deductible under the normal deduction provisions under the IRO provided that such payments are incurred in the production of assessable profits.

However, any salaries paid to a sole proprietor or any partners or partners’ spouses of a partnership business are not tax-deductible for profits tax purpose.

Bad Debts

Tax deduction is generally allowed for bad debts (including provision of doubtful debts) that are proved to the satisfaction of the Hong Kong Inland Revenue Department (“IRD”) to have become bad. The deduction shall be limited to debts that were included as trading receipts in ascertaining the assessable profits or debts in respect of money lent in the ordinary course of a money-lending business in Hong Kong.

Charitable Contributions

Approved charitable donation is allowed if the aggregate of such donations is not less than HKD 100. The deduction is limited to 35% of the assessable profits of the year of assessment.

Contributions to Mandatory Provident Fund (“MPF”) / Recognised Occupational Retirement Scheme (“ROR”)

Regular/ordinary contributions to a MPF or ROR made by an employer for an employee shall be tax deductible to the extent that the contributions do not exceed 15% of the employee’s total emoluments.

On the other hand, tax deduction on special contributions, other than the ordinary contributions to a MPF or ROR, shall be allowed at 20% evenly over five years.

Provision for Expenses

Specific provision for expense is generally tax-deductible if they are revenue nature expenses that were incurred in the production of the taxpayer’s assessable profits.

In determining whether a provision for expense has been incurred, the taxpayer should have a legal or contractual obligation to pay such expense and the provision is made by a reasonably accurate estimate of the future liability.

On the other hand, general provision for expense is not tax-deductible as it would not be considered as “incurred” which is one of the conditions imposed under the general tax deduction rule in the IRO.

Interest Expenses

For an interest expense to be deductible, in addition to satisfying the general deduction provisions under the IRO (i.e. it should be incurred in the production of assessable profits), the interest expense has to meet certain specific conditions as specified therein.

Although there is no thin capitalisation rule in Hong Kong, interest expenses paid to overseas group companies are generally not tax-deductible in Hong Kong, except for where such interest expenses are paid by a company engaging in an intra-group financing business and certain specified conditions are satisfied.

Foreign Taxes

Foreign corporate income taxes are generally not deductible in Hong Kong as the IRD considers that the nature of income tax (i.e. similar to Hong Kong profits tax) are not outgoings and expenses incurred in the production of assessable profits (i.e. the general tax deduction provisions under the IRO), but are charges on the profits.

On the other hand, other types of foreign taxes (e.g. value-added tax) that are not calculated by reference to the profits may be deductible under the general deduction rules in the IRO. Under certain circumstances, foreign tax credit is available for foreign taxes paid under double tax treaties entered by Hong Kong with other jurisdictions.

Tax Losses

Tax losses can be carried forward indefinitely to offset assessable profits in future but cannot be carried backward. No tax loss relief among group companies is available in Hong Kong.

Expenses Paid to Foreign Group Companies

Royalties, service fees, management fees, etc. paid to foreign affiliated companies are deductible provided these expenses are revenue in nature and were incurred in the production of assessable profits.

Other Tax Incentives / Reductions

  • Under the two-tiered profits tax rates regime, the first HKD 2 million of assessable profits earned is subject to half of the normal profits tax rate (i.e. currently 8.25% for corporate and 7.5% for unincorporated businesses) provided that certain conditions can be met.
  • Interest income and trading profits derived by corporations from qualifying debt instruments (including instruments lodged and cleared by the Central Money markets Unit of the Hong Kong Monetary Authority and debt securities listed on the Hong Kong Stock Exchange) are taxed at a reduced tax rate of 8.25% or exempt from tax, depending on the tenure and the issuance date of the debt instruments, provided that certain conditions are met.
  • The assessable profits of a corporation derived from the business of reinsurance as a professional reinsurer or from the business of insurance as an authorized captive insurer are eligible to be taxed at 50% of the normal profits tax rate (i.e. at a rate of 8.25%), provided that certain conditions are met.
  • Authorized and certain bona fide widely held mutual funds, collective investment schemes and unit trusts are exempt from tax.
  • The assessable profits derived by qualifying corporate treasury centres are taxed at 50% of the normal profits tax rate (i.e. at a rate of 8.25%) provided that certain conditions are satisfied.
  • The assessable profits derived by qualifying aircraft lessors and qualifying aircraft leasing managers are subject to a concessionary tax rate at 8.25% provided that certain other conditions are met.
  • The assessable profits derived from qualifying ship lessors are exempt from profits tax whereas profits derived from qualifying ship leasing manager are either exempt from profits tax if the ship leasing services recipient are affiliated corporations or taxed at the concessionary tax rate at 8.25% if the recipients are independent third party corporations provided that certain other conditions are met.
  • The profits derived from transactions in qualifying assets and incidental transactions thereto by entities qualified as a “fund” as defined under Section 20AM of the IRO are exempt from profits tax provided that all the prescribed conditions are met, regardless of their structure, size and the place of central management and control (i.e. onshore or offshore).
  • For non-resident entities, not being qualified as a “fund” under Section 20AM of the IRO, provided that certain conditions are met, their profits derived from transactions in qualifying assets and the incidental transactions thereto are exempt from profits tax.
  • Effective from 19 March 2021, qualifying profits of all general reinsurance business of direct insurers, selected general insurance business of direct insurers and selected insurance brokerage business can be taxed at one-half of the normal tax rate (i.e. 8.25%).

Tax Deductions on Salaries Tax

Salaries tax is charged at progressive rates ranging from 2% to 17% on net chargeable income (i.e. assessable income after deductions and allowances) or at standard rate of 15% on net assessable income (i.e. assessable income after deductions), whichever is lower. Common types of deductions and allowances are as follows.

Expenses

Outgoings and expenses, other than expenses of a domestic or private nature and capital expenditure, which are incurred wholly, exclusively, and necessarily in the production of assessable income are deductible for salaries tax purposes. In practice, the deductibility of expenses under salaries tax is restrictive and only a few expenses can be deducted.

Depreciation Allowance

Depreciation allowances may be allowed on capital expenditure incurred on plant and machinery which are used in the production of assessable income.

Contributions to MPF and ROR

Mandatory contributions made by employee to MPF or contributions made to ROR are deductible in calculating one’s net assessable income. The amount of deduction however is limited to a prescribed amount, which currently stands at HKD 18,000 for the year of assessment 2020/21.

Qualifying Annuity Premiums & Tax Deductible MPF Voluntary Contributions

Tax deductions are available for qualifying annuity premiums and tax deductible MPF voluntary contributions starting from the year of assessment 2019/20.

The deduction allowable to each taxpayer should not exceed the aggregate of qualifying annuity premiums and tax deductible MPF voluntary contributions paid during the year of assessment or the specified maximum deduction, whichever is lower. Currently, the specified maximum deduction (the aggregate limits for both items) is HKD 60,000.

There is no limit for the number of the qualifying deferred annuity policy. Taxpayer may claim deduction for qualifying annuity premiums paid under one or more than one policy.

Qualifying Premiums Paid under the Voluntary Health Insurance Scheme (VHIS)

Tax deductions are available to taxpayers who pay qualifying premiums under a Certified Plan of VHIS for themselves or their specified relatives starting from the year of assessment 2019/20. The maximum amount of tax deduction is HKD 8,000 per each insured person for each year, without a cap on the number of specified relatives claimed by the taxpayer.

Charitable Donations

Approved charitable donations are tax deductible but capped at 35% of the net assessable income.

Elderly Residential Care Expenses

Residential care home expenses paid for parents or grandparents of a taxpayer or spouse are deductible, subject to an annual deduction ceiling for each parent or grandparent. The deduction ceiling is currently at HKD 100,000 per each tax year.

Self-education Expenses

Expenses of self-education (including tuition and the related examination fees) paid for a prescribed course of education are deductible. The maximum amount of deduction is currently at HKD 100,000 for each tax year.

Home Loan Interest Expenses

Home loan interest paid for the acquisition of a dwelling situated in Hong Kong which is used as the place of residence can be deducted from the assessable income, subject to a maximum limit of HKD 100,000 per each tax year. The home loan interest expenses can be deducted for a maximum of 20 years.

Personal Allowances

Taxpayers are entitled to a basic allowance and other allowances, provided that the prescribed conditions as specified in the IRO are satisfied. The current amounts of allowances are shown below:

  • Basic Allowance: HKD 132,000
  • Married Person’s Allowance: HKD 264,000
  • Child Allowance:
    • For each of the 1st to 9th child: HKD 120,000
    • For each child born during the year, the Child Allowance will be increased by: HKD 120,000
  • Dependent Brother or Sister Allowance: HKD 37,500
  • Dependent Parent and Grandparent Allowance
    • Aged 60 or above: HKD 50,000
    • Aged under 60 but was eligible to claim an allowance under the Government’s Disability Allowance Scheme: HKD 50,000
    • Aged 55 or above but below 60: HKD 25,000
  • Additional Dependent Parent and Grandparent Allowance
    • Aged 60 or above: HKD 50,000
    • Aged under 60 but was eligible to claim an allowance under the Government’s Disability Allowance Scheme: HKD 50,000
    • Aged 55 or above but below 60: HKD 25,000
  • Single Parent Allowance: HKD 132,000
  • Personal Disability Allowance: HKD 75,000
  • Disabled Dependant Allowance: HKD 75,000

Foreign Taxes

Double taxation relief is available for foreign taxes paid provided that certain conditions are satisfied. The relief will be provided either by exempting the income that is subject to double taxation (if Hong Kong does not have a double tax treaty with the counterpart jurisdiction) or by granting a tax credit (if such double tax treaty is in place).

Election for Personal Assessment

Personal assessment may provide relief if one has income that is chargeable to profits tax and/or property tax. Under personal assessment, income from office, employment and pension, unincorporated business profits and rental income from properties are to be assessed on an aggregate basis.  Tax is to be charged on the aggregated amount of income in the same way as the computation of Salaries Tax.

The election for personal assessment will enable taxpayers to deduct the above-mentioned allowances from their aggregated income, interest expenses on money borrowed for producing taxable property rental income and to offset the business tax losses sustained from their sole proprietorship / partnership business against the income from other sources.

HKWJ Tax Law & Partners can assist you to make sure you are fully benefiting from the different tax allowances, deductions and incentives.

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