A donation tax deduction is a provision in tax law that allows individuals or businesses to reduce their taxable income by the amount of qualifying donations made to eligible charitable organizations. Essentially, when you make a donation to a qualified charity, you can often deduct the value of that donation from your taxable income, thereby reducing the amount of tax you owe. During a year-long assessment, approved charitable donations made by individuals and businesses that are subject to profits tax, personal assessment, or salaries tax may be deducted up to 35% of the total amount of assessable income or profits, as applicable. This total must not be less than HK$100. (The Inland Revenue Ordinance (the IRO), Sections 16D and 26C)
An “approved charitable donation” is any financial contribution made for philanthropic purposes to the government or any public charity or trust that is exempt from tax under Section 88 of the IRO. (Part II of the IRO)
To find out if their donations qualify for a tax break, members of the public can consult the list of public trusts and charity institutions that are exempt from taxes under section 88 of the IRO.
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A Publicly Known Charitable Institutions and Trusts’ Tax Guide
Under section 88 of the IRO, public trusts and charitable institutions may be free from taxes. The “Tax guide for charitable institutions and trusts of a public character” has been released by the Department for public use. Donors who contribute to these organizations may be eligible for donation tax deduction.
Application for Recognition of Donation Tax Deduction Status Under Section 88 of the Inland Revenue Ordinance
It is vital that a charity to be founded through a written instrument which is a detailed formal document articulating essential provisions relating to the administration of the charity including its charitable purposes or objectives, the constitution of its governing body and the ways for holding meetings. The instrument of governance being used by a charity is subjected to the legal form that it has chosen to adopt. The terminology may differ according to the legal entity type: Articles of Association for a limited company, ordinance for a body established by statute, trust deed for a trust, or constitution for a society.
A charity’s governing instrument, preferably, ought to state the charitable purpose either with precision and clarity or in rather definite terms, among other critical clauses as well. There will be the next guidance note if you want more details about the companion that the charities need in their governing instrument. It is called “Guidance on writing charitable purposes in the governing instrument“.The key clauses would be illustrated in issues like “Examples of generally containing clauses in a charity’s instrument of incorporation”.
Charities or any organisation that want donation tax deduction under section 88 of the IRR should read the “A Tax Guide for Charitable Institutions and Trusts of a Public Character” before making an application. When applying for associations, the organisation should fill in the application form which follows and provide the documents as listed in the same form to the Department.
- Application for Recognition of Donation Tax Deduction Status under Section 88 of the Inland Revenue Ordinance (Cap. 112) (C.D.22)
- Annex to Application Form C.D.22 (C.D.22A)
- Notes to Applicants (C.D.22B)
The letter should be addressed to the Commissioner of Inland Revenue on G.P.O. Box 132, Hong Kong. Incomplete application forms (including an incomplete form with insufficient supporting documents) will be returned to the applicant with the request to follow up on the missing paperwork before the application for the permit is processed.
The Department strives to respond within 4 months provided applicants supply all relevant data supporting their application, and no further information about them will be demanded.
Potential of Revenue Tax Liabilities for Tax-exempt Organizations
Tax-exempt organizations can face potential tax liabilities if they engage in commercial activities. Under Section 88 of the IRO, charities that earn profits are only exempt from taxes if:
- Profits are solely used for charitable purposes.
- Profits are not spent outside Hong Kong.
- Business activities align with the charity’s objectives or benefit those the charity supports. If a charity fails to meet these requirements, their business profits may be subject to taxation.
If, however, a charity, a trade or business, forming a property letting fund or a hotel or catering services fund, the profits derived from that trade or business, including interest incomes and investment gains, are tax-exempt as long as all the conditions in the Proviso to section 88 of the Income Ordinance are met. The sole option for these trades and business will be to be taxable under section 14(1) of the IRO if they derived profits in or from Hong Kong.
Regarding donation tax deduction, it’s important to note that the trade or business activities of a charity must be closely linked to achieving the charity’s specific objects to be eligible for tax benefits. If the business activities do not directly contribute to the fulfillment of the charity’s stated objectives, they may not qualify for donation tax deductions. For example, renting out property to tenants who do not align with the chosen service category of the charity would not meet this condition. The collection of money or funds that do not bear any direct logical relationship to the achievement of the laid out objects of the charity (eg, renting of the property to the tenants who do not belong to the chosen service category of the charity) cannot meet the condition.
The fact that the profits from the business or trade proceeds to be available on the charitable objects of the charity does not necessarily imply that all the conditions agreed upon by the IRO shall have been met. Therefore, what business to carry on, or whether or not the trade or business directly aided in the work of the organization, determines the issue of the trade or business being exercised in the actual implementation of the objects of the charitable venture.
Moreover, a marked separation must be still made between a charity objects (the charitable purposes of the charity which was established to achieve) and its powers (in this case, the powers which support the charities and may allow the objects to be achieved incidentally (for example the power to lease out its properties)) Whether the organization’s objectives are in agreement with its clauses stating when its powers shall be exercised is a separate topic
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