Deductible and Non-Deductible Business Expenses in Hong Kong

Running a business in Hong Kong comes with a clear advantage: a simple and competitive tax system. Yet, one of the most common areas where companies lose money is in misclassifying their expenses. Knowing which costs are tax deductible and which are non deductible expenses is essential for accurate profit tax computation and avoiding costly disputes with the Inland Revenue Department (IRD).

At its core, the IRD applies a straightforward rule — an expense is deductible only if it is wholly and exclusively incurred for producing assessable profits and is not capital in nature. From staff salaries and marketing costs to depreciation allowances on prescribed fixed assets, properly claiming deductions can significantly reduce your tax bill. On the other hand, claiming private expenses, fines, or capital outlays as deductions can lead to rejection, penalties, or even additional tax assessments.

This guide breaks down the key categories of Hong Kong profit tax deductible expenses, highlights common non deductible expenses, explains the rules for prescribed fixed assets, and provides practical tips to ensure your company stays compliant while maximising every allowable deduction.

Deductible Expenses

Expenses are considered deductible if they are wholly and exclusively incurred for producing assessable profits and are not capital in nature. These expenses reduce taxable income and directly impact profit tax computation. Deductible expenses are generally linked to the day-to-day operations of the business, supporting revenue generation or maintaining business activities.

Non-Deductible Expenses

Non-deductible expenses are costs that cannot be subtracted from accounting profits to reduce taxable income. These include capital outlays, personal or domestic expenses, fines, penalties, pre-commencement costs, and general provisions for future liabilities. They are disallowed because they are either not wholly for producing assessable profits or are capital in nature.

Hong Kong Profit Tax Computation in 2025

Before identifying which expenses are deductible, businesses must first understand how profit tax computation works in Hong Kong. Unlike many jurisdictions, Hong Kong follows a territorial source principle: only profits arising in or derived from Hong Kong are taxable. Offshore income, provided it meets certain conditions, is not subject to profits tax.

Two-Tier Profits Tax Rates

Hong Kong operates a two-tier profits tax regime:

• Corporations:
  
  • 8.25% on the first HK$2 million of assessable profits
    
  • 16.5% on the remaining profits
    
• Unincorporated businesses (sole proprietorships and partnerships):
  
  • 7.5% on the first HK$2 million of assessable profits
    
  • 15% on the remaining profits
    

Only one entity within a group of connected companies can enjoy the two-tier rates. Others must apply the standard rate.

Budget 2025 Update: One-Off Concession

For the year of assessment 2024/25, the government announced a one-off tax reduction of 100% capped at HK$1,500 per case. This concession applies to both corporations and unincorporated businesses, lowering the final tax payable. Note that this is a rebate, not a deductible expense.

Why Deductible Expenses Matter

Assessable profits are calculated by adjusting accounting profits for tax purposes. Businesses start with their net profit per financial statements, then:

1. Add back non deductible expenses (e.g., capital expenditure, fines, provisions).
   
2. Subtract tax deductible expenses (e.g., staff salaries, rent, allowable depreciation, approved donations).
   

The resulting figure is the assessable profit subject to the two-tier tax rates. Accurate classification of deductible and non deductible expenses is therefore crucial to ensuring your company pays the correct amount of tax.

What Counts as Tax Deductible in Hong Kong

When preparing your profits tax return, the Inland Revenue Department (IRD) allows deductions for expenses that are wholly and exclusively incurred in producing assessable profits. These hong kong profit tax deductible expenses reduce taxable income and directly impact your profit tax computation.

Staff & Employment Costs

• Salaries, wages, allowances, and bonuses
  
• Employer contributions to MPF or recognised retirement schemes (capped at 15% of employee remuneration)
  
• Severance and long-service payments required by law
  
• Reasonable directors’ fees
  

Premises & Utilities

• Rent for office, factory, or retail premises
  
• Government rates and building management fees
  
• Utilities such as electricity, water, telephone, and business internet
  
• Repairs and maintenance of premises or equipment (excluding capital improvements)
  
• Reinstatement costs when returning leased premises to their original condition (deductible from YA 2024/25 onwards)
  

Finance & Professional Services

• Audit, accounting, and bookkeeping fees
  
• Business-related legal fees (e.g., debt collection, contract enforcement)
  
• Bank charges and transaction fees
  
• Interest on loans used to generate chargeable profits (subject to Hong Kong’s anti-avoidance rules)
  

Operations, Marketing & Travel

• Advertising, marketing campaigns, and PR expenses
  
• Cost of trading stock, raw materials, and consumables
  
• Entertainment directly related to business (e.g., client meals, partner events)
  
• Travel expenses for business purposes (flights, hotels, local transport for business meetings — but not home-to-office commutes)
  

Charitable Donations

• Cash donations to approved charitable institutions in Hong Kong
  
• Deductible if aggregate donations are at least HK$100 and do not exceed 35% of assessable profits
  

Research & Development (R&D)

Hong Kong offers enhanced tax deductions for R&D expenditure:

• Type A: 100% normal deduction
  
• Type B: 300% deduction on the first HK$2 million, and 200% on the remainder (with no cap)
  This applies to qualifying R&D activities carried out in or arranged through Hong Kong.
  

Prescribed Fixed Assets (Special Deduction)

Certain capital items qualify for 100% immediate deduction, unlike other fixed assets which use depreciation allowances. These include:

• Machinery or plant used specifically and directly for manufacturing
  
• Computer hardware not integrated into machinery
  
• Computer software and IT systems

Bad Debts

• Deductible if incurred in trade or business and proved to the satisfaction of the IRD
  
• Limited to debts previously included as trading receipts or money lent in the ordinary course of business
  
• Special rules apply if using fair value accounting for financial instruments (only credit-impaired debts are deductible)
  
• Recovered bad debts are treated as taxable profits in the year of recovery
  

Pension and Retirement Contributions

• Regular contributions to MPF or recognised occupational retirement schemes are deductible
  
• Deduction capped at 15% of employee emoluments
  
• Special provisions allow capital payments to be deducted evenly over five years
  

Payments to Directors

• Director fees and remuneration are deductible for corporations
  
• Salaries or payments to proprietors, partners, or their spouses are non-deductible
  

Provisions and Contingent Liabilities

• General provisions are non-deductible
  
• Specific provisions are deductible if a legal or contractual obligation exists and amounts are reasonably estimated
  

Special Deductions

• Building refurbishment: Non-domestic buildings or structures
  
• Environmental protection installations & eco-friendly vehicles
  
• Prescribed fixed assets: Machinery, computers, IT systems used directly in business
  
• Intellectual property rights, patents, trademarks: Registration or purchase costs, subject to conditions
  
• Spectrum utilisation fees
  
• Reinstatement costs for leased premises

Prescribed Fixed Assets — 100% Deduction

While most capital expenses in Hong Kong are not immediately deductible, the Inland Revenue Ordinance provides a special regime for prescribed fixed assets. Qualifying items—such as certain plant and machinery, computer hardware, and software—are eligible for a 100% deduction in the year of purchase. However, assets acquired under hire-purchase, leased assets, or items partly used for non-business purposes do not fully qualify.

What Qualifies as Prescribed Fixed Assets

The following items fall under the prescribed fixed assets regime:

• Manufacturing plant and machinery used directly and exclusively in production.
  
• Computer hardware (unless it is an integral part of another machine).
  
• Computer software and systems, including upgrades essential to business operations.
  

Timing of Deduction

• Businesses may claim a full deduction in the year the expenditure is incurred.
  
• No need to amortise or claim allowances over several years, unlike industrial or commercial building allowances.
  

Restrictions to Note

• Assets acquired through hire-purchase agreements do not qualify.
  
• Where a company only has rights as a lessee, the deduction is not available.
  
• If an asset is only partly used to produce chargeable profits, the deduction must be apportioned accordingly.
  

Disposal of Prescribed Fixed Assets

If the asset is later sold, any sale proceeds exceeding the tax deduction previously claimed will be treated as taxable trading receipts. This prevents businesses from both claiming the deduction and profiting from the disposal tax-free.

For companies in technology, manufacturing, and services, the prescribed fixed assets deduction is one of the most valuable tools to accelerate tax savings. By immediately deducting investments in IT and equipment, businesses improve cash flow and reduce their profit tax liability in the year of acquisition.

Capital vs Revenue: Other Depreciation Allowances

Not all capital purchases qualify as prescribed fixed assets. For other buildings, structures, and equipment, Hong Kong provides statutory depreciation allowances. Importantly, accounting depreciation in financial statements is not deductible for profits tax purposes—only statutory allowances prescribed by the IRD may be claimed.

These allowances ensure that businesses can gradually recover the cost of major capital assets over time. Unlike immediate deductions, they follow specific schedules set by the Inland Revenue Department (IRD).

Key Points for Businesses

• Use IRD statutory allowances; not book depreciation.
  
• If an asset is sold, the IRD applies balancing adjustments (additional tax or relief depending on sale proceeds vs. written-down value).
  
• Correctly classifying assets at acquisition ensures you can claim the highest allowable deduction.
  

By combining these allowances with tax deductible expenses and the prescribed fixed assets regime, businesses can significantly reduce taxable income and optimise their cash flow.

Non-Deductible Expenses in Hong Kong

Not every business cost can be written off. The IRD explicitly disallows certain non deductible expenses, even if they seem business-related. These amounts must be added back during profit tax computation to avoid understatement of assessable profits.

Common Non-Deductible Expenses

Grey Areas to Watch

• Entertainment expenses: Only deductible if directly linked to business (client meetings, partner events). Purely social or private meals will be disallowed.
  
• Home office costs: Deductible only if space is exclusively used for business and apportionment is reasonable.
  
• Travel expenses: Business trips are deductible, but daily commuting between home and office is not.
  

Misclassifying non deductible expenses is one of the most common errors SMEs make in Hong Kong. It can lead to IRD adjustments, penalties, or missed opportunities to claim allowable deductions. A well-structured chart of accounts with a separate non-deductible category makes year-end tax filing smoother and reduces audit risk.

IRD Compliance & Documentation

Claiming a deduction is only half the battle — the Inland Revenue Department (IRD) requires solid evidence to support every item. Without the right paperwork, even legitimate tax deductible expenses can be reclassified as non deductible expenses during an enquiry or audit.

Record-Keeping Requirements

• All business income and expenditure records must be kept for at least 7 years.
  
• Records must be sufficient to prove the nature, purpose, and amount of each transaction.
  
• Both paper and digital records are acceptable, provided they are complete, accurate, and retrievable.
  

Essential Documentation Checklist

Invoices & Receipts — must include vendor name, date, description, and amount.
Bank & Credit Card Statements — corroborate payment flows.
Contracts & Agreements — tenancy contracts, loan agreements, service contracts.
Payroll Records — detailed breakdown of salaries, bonuses, MPF contributions.
Expense Reimbursement Forms — with business purpose clearly stated (e.g., “client meeting with ABC Ltd, contract negotiation”).
General Ledger & Books of Account — reconciled monthly, with non-deductible items tracked in separate accounts.

The IRD’s most common reason for disallowing deductions is insufficient evidence. Even small items such as taxi fares or meal receipts may be rejected without clear business purpose stated. To strengthen your tax position, always annotate receipts with context (e.g., ‘Client meeting with ABC Ltd, contract negotiation’). By keeping detailed, organised records, businesses minimise disputes and strengthen their tax position.

Sample Chart of Accounts for Deductible Business Expenses in Hong Kong

A well-organized Chart of Accounts (COA) is the backbone of effective bookkeeping and a critical tool for simplifying Hong Kong Profits Tax filing. By clearly separating deductible and non-deductible items, businesses can reduce errors, streamline tax reporting, and maximise allowable deductions.

Below is a sample COA structure designed for a small service or trading business in Hong Kong. This structure helps track expenses in a way that aligns with IRD requirements and ensures smooth profit tax computation.

1. Cost of Goods Sold (COGS)

These accounts are used if your business sells physical products. COGS items are generally fully deductible.

• 5000 – COGS
  
  • 5100: Purchases – Raw Materials
    
  • 5200: Purchases – Finished Goods for Resale
    
  • 5300: Freight & Shipping Inwards
    

2. Operating Expenses (Overheads)

These are day-to-day costs of running your business. Most items are fully or partially deductible under Hong Kong tax rules.

2.1 Staff Costs

• 6110: Salaries & Wages
  
• 6120: Commissions & Bonuses
  
• 6130: MPF Contributions – Employer Portion
  
• 6140: Staff Training & Development
  
• 6150: Staff Welfare (e.g., team lunches, pantry supplies)
  
• 6160: Severance & Long Service Payments
  

2.2 Office & Premises Expenses

• 6210: Rent – Office / Commercial Space
  
• 6215: Rent – Home Office (Apportioned) (track separately for clarity)
  
• 6220: Government Rates & Rent
  
• 6230: Building Management Fees
  
• 6240: Utilities – Electricity & Water
  
• 6250: Internet & Telephone
  

2.3 Professional & Legal Fees

• 6310: Accounting & Audit Fees
  
• 6320: Legal Fees – Business Operations (e.g., debt collection)
  
• 6330: Consultancy Fees
  

2.4 Sales & Marketing Expenses

• 6410: Advertising & Promotion
  
• 6420: Entertainment – Business Related (client meals, partner events)
  
• 6430: Website Hosting & Software Subscriptions
  
• 6440: Marketing & PR Services
  

2.5 Travel Expenses

• 6510: Airfare – Business Travel
  
• 6520: Accommodation – Business Travel
  
• 6530: Local Transport – Business (e.g., client visits, not home-to-office commute)
  

2.6 General Business Expenses

• 6810: Bank Charges
  
• 6820: Business Insurance Premiums
  
• 6830: Office Supplies & Stationery
  
• 6840: Repairs & Maintenance – Equipment (Note: Improvements are capital, not expenses)
  
• 6850: Approved Charitable Donations (deduction capped at 35% of assessable profits)
  

3. Non-Deductible Expenses

Separating non-deductible expenses in your COA helps avoid mistakes during profit tax computation.

• 6910: Fines & Penalties
  
• 6920: Legal Fees – Capital Nature (e.g., company setup, asset purchase)
  
• 6930: Profits Tax Paid

Why Using a COA Matters

1. Simplifies Tax Filing: Clear separation of deductible and non-deductible items reduces errors and IRD queries.
   
2. Improves Reporting Accuracy: Helps track expenses by category for accurate financial statements.
   
3. Supports Compliance: Provides audit-ready records for all business transactions.
   
4. Maximizes Tax Savings: Ensures all allowable deductions—such as salaries, rent, R&D, and charitable donations are captured.
   

Tip for SMEs:

• Customize your COA for your business type (service vs. trading).
  
• Track home-office and mixed-use expenses separately for clarity.
  
• Keep detailed invoices and receipts linked to each COA account for IRD verification.

Notes on Capital Assets and Private Expenses in Hong Kong Bookkeeping

Proper categorization of expenses and assets is crucial for accurate bookkeeping and Hong Kong Profits Tax compliance. Misclassifying major purchases or personal costs can lead to incorrect tax reporting, lost deductions, or IRD inquiries.

1. Capital Assets

When a business purchases major assets—such as computers, vehicles, office furniture, or other equipment—these costs should not be recorded as ordinary expenses in your Profit & Loss account.

Instead:

• Record them in Asset accounts (typically in the 1700 range) on your balance sheet.
• For tax purposes, claim statutory Depreciation Allowances on these assets during profit tax computation.
• This is a separate calculation from your day-to-day expenses in the Profit & Loss statement.

Why it matters:

• Helps distinguish between capital expenditure (long-term assets) and operating expenses.
• Ensures the correct application of depreciation and tax deductions.
• Avoids IRD adjustments for incorrectly expensed assets.

Example:

2. Private or Personal Expenses

Any costs that are purely for personal use such as meals, travel, or personal subscriptions should not be mixed with business expenses.

Instead:

• Allocate these to an Owner’s Drawings or Shareholder Loan account (typically in the 3000 range).
• Maintain a clear separation between personal and business spending.

Why it matters:

• Mixing personal and business expenses can trigger tax disputes or penalties.
• Ensures transparent bookkeeping for audits or financial reporting.
• Makes it easier to calculate true business profits and allowable deductions.
  

Example:

Key Takeaways

1. Major assets belong on the balance sheet, not in expense accounts.
2. Claim Depreciation Allowances separately for capital assets in your profits tax computation.
3. Personal or private expenses should be recorded under Owner’s Drawings or Shareholder Loan accounts, not mixed with business expenses.
4. Clear categorization protects your business during IRD audits and ensures accurate tax filings.

Why the IRD Rejects Deduction Claims

Even if your expense looks legitimate, the Inland Revenue Department (IRD) can still disallow it. Understanding the most common rejection reasons — and how to prevent them — is key to maximising tax deductible claims while avoiding unnecessary disputes.

1. Lack of Evidence

• Issue: Missing invoices, receipts, or payment records.
  
• Solution: Always keep original invoices with clear vendor details, and cross-reference with bank statements.
  

2. Expense Not Wholly Business-Related

• Issue: Costs that are private or domestic in nature (e.g., personal meals, family travel).
  
• Solution: Ensure all claims meet the “wholly and exclusively” test. Maintain separate accounts for personal and business spending.
  

3. Misclassifying Capital as Revenue

• Issue: Claiming full deduction for assets like vehicles or machinery as if they were operating expenses.
  
• Solution: Record such purchases as capital, then claim depreciation allowances or prescribed fixed assets deductions as permitted.
  

4. Unclear Business Purpose

• Issue: Submitting receipts without context (e.g., a dinner bill without explanation).
  
• Solution: Annotate receipts with names of attendees, topics discussed, and business outcome.
  

5. Pre-Commencement Expenses

• Issue: Attempting to deduct costs incurred before trading began (e.g., incorporation fees, market surveys).
  
• Solution: Treat these as capital in nature. Only expenses after business commencement are deductible.
  

6. Excessive or Non-Approved Contributions

• Issue: Pension or retirement contributions above the 15% limit, or into schemes not approved by the IRD.
  
• Solution: Track MPF and retirement scheme contributions carefully, ensuring compliance with statutory caps.

Practical Example of Profit Tax Computation

To see how hong kong profit tax deductible expenses and non deductible expenses affect the bottom line, let’s walk through a simplified case.

Example: Corporation with HK$1.8 Million Accounting Profit

Step 1: Start with accounting profit

• Net profit per accounts: HK$1,800,000
  

Step 2: Add back non deductible expenses

• Parking fines: HK$10,000
  
• General provision for doubtful debts: HK$20,000
  Subtotal added back: HK$30,000
  

Step 3: Deduct tax deductible items

• Bad debts written off: HK$50,000
  
• Approved charitable donations (≤35% cap): HK$40,000
  Subtotal deducted: HK$90,000
  

Step 4: Apply capital allowances / prescribed fixed assets

• New machinery purchase (qualifies as prescribed fixed assets): HK$200,000 → 100% deduction
  
• Office renovation costs: HK$500,000 → deduct over 5 years = HK$100,000 this year
  Total capital allowances: HK$300,000
  

Step 5: Compute assessable profits
1,800,000 + 30,000 – 90,000 – 300,000 = HK$1,440,000

Step 6: Apply two-tier tax rates (corporation)

• First HK$1,440,000 taxed at 8.25% (since under HK$2m):
  = HK$118,800
  

Step 7: Apply Budget 2024/25 concession

• Apply Budget 2024/25 concession — Less one-off tax reduction of 100% capped at HK$1,500 (rebate on tax payable, not an expense deduction).
  

Final Profits Tax Payable: HK$117,300

Summary of Deductible vs Non-Deductible  Hong Kong Business Expenses 

Checklist for Businesses: Managing Deductible and Non-Deductible Expenses

Conclusion: Stay Compliant, Maximise Savings

Navigating Hong Kong profit tax deductible expenses and distinguishing them from non deductible expenses is crucial for accurate profit tax computation. From staff costs and prescribed fixed assets to R&D incentives and charitable donations, claiming the right deductions can significantly reduce your tax bill. On the other hand, misclassifying expenses—such as private costs, penalties, or capital items—can lead to IRD rejections, unnecessary tax payments, or even penalties.

The key is simple: maintain clear records, separate deductible and non-deductible expenses, and use structured tracking like an expense ledger and fixed asset register. By doing so, you ensure compliance, avoid disputes with the IRD, and unlock every allowable tax saving available.

At FastLane, we specialise in guiding businesses through Hong Kong’s tax system—helping you structure your accounts, identify all possible deductions, and prepare compliant filings. Whether you’re an SME or a growing multinational, our tax experts ensure you claim what you’re entitled to while staying fully IRD-compliant.Get in touch with FastLane today to optimise your profit tax computation and maximise your savings.