Tax Allowance HK A Guide to Deductions & Incentives

Tax Allowance HK: A Guide to Deductions & Incentives

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Taxation

The tax system in Hong Kong is characterized by its low rates and simplicity as well as some tax allowance. It should be noted that, in Hong Kong, there are no value-added taxes or goods and services taxes. On the other hand, the Hong Kong Inland Revenue Ordinance (IRO) imposes three types of taxes.

  • Property Tax, which is imposed on rents of immovable properties situated in Hong Kong;
  • Salaries Tax, which is imposed on income that is generated in or derived from Hong Kong from any office, employment or pension; and
  • Profits Tax is levied on assessable profits derived from any trade, profession or business carried on in Hong Kong, arising in or derived from Hong Kong.

With regard to the Property Tax, the allowable tax deductions are few but cover the so called government rates paid by the owner and an allowance for repairs and outgoings amounting to 20% of the assessable value (i.e. the rental income) less the rates mentioned.

Whereas for Profits Tax and Salaries Tax there are numerous tax deductions, allowances and incentives available based on the taxpayer’s situation. Therefore, the tax deductions, allowances and incentives addressed below are confined to Profits Tax and Salaries Tax.

Profits Tax Deduction: Understanding Tax Benefits

The computation of assessable profits starts with the accounting profits prepared under GAAP which will be adjusted by statutory tax adjustments in the IRO.

General deduction provisions of the IRO allow for the deduction of outgoings and expenses that arise in the production of assessable profits, other than those specifically disallowed. Hence, GAAP accrued expenses are deductible for tax purposes if they are revenue in nature and not specifically disallowed under the IRO.

The tax deductibility of capital expenditure is based on certain provisions of the IRO that are determined by the types of asset/expenditure. The tax credit is also given for eligible research and development expenses.

Special rules for tax deductions of certain expenses (e.g. interest expense) apply. Below are more detailed explanations of some of the common types of tax deductions as stipulated in the IRO.

Related Article: 2024 Tax Filing Season: Tax Deadline 2024 in Hong Kong You Need To Know About

Fixed Assets Depreciation: Understanding Depreciation Tax Allowance HK

Depreciation as per accounting portrayed in financial statements are usually not subject to tax deduction. Depreciations / capital allowances in respect of capital expenditure on fixed assets that are used in the production of assessable profits, are however, tax deductible. Common types of these allowances:

  • Industrial buildings and structures: For the capital expenditure incurred on the construction of new industrial buildings and structures, the 20% initial allowance is given in the year of acquisition and the annual allowance of 4% is given thereafter. In the case of existing buildings and structures existing annual allowance is available, but the base of the calculation is different which depends on when such buildings and structures have been put in use and how long they have been used for. Industrial buildings and structures referred to those buildings and structures used for carrying on a qualifying trade e.g. manufacturing.
  • Commercial buildings and structures: A 4% annual allowance is provided for the capital expenditure on the building of new commercial buildings and structures. The annual allowance for existing commercial buildings and structures is determined by a different formula that depends on when such buildings and structures were first placed into service and the number of years they were used for. Other buildings and structures that do not qualify as industrial buildings and structures are commercial buildings and structures.
  • Refurbishment of non-domestic building or structure: A tax deduction of 20% on capital expenditure of the renovation and refurbishment of non-domestic buildings or structures can be spread across five years.
  • Plant and machinery: In the year of acquisition, an initial allowance is equal to 60% of the capital expenditure on plant and machinery, and an annual allowance will be provided in the year of acquisition and in each of the subsequent years. The rate of annual allowance is 10%, 20% or 30% on the written down value depending on the types of plant and machinery used.
  • Computer hardware and equipment, manufacturing plant and machinery, environmental protection installation, environmental protection machinery or environment-friendly vehicle: Subject to certain conditions being met, capital expenditure on these types of assets can be eligible for full deduction in the year of acquisition.

Intellectual Property

  • Patent rights and right to know-how: Under certain specific 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: The capital expenditure on copyright, performer’s economic right, protected layout-design (topography) right, protected plant variety right, registered design or registered trade mark is claimed equally over a period of 5 years. In certain cases, a shorter duration of deduction might be relevant.

Many anti-avoidance tax rules on intellectual property should be considered when thinking about tax deductions, one should be very careful when it comes to intellectual property tax implications and how to do proper tax planning.

Research & Development Expenditure

Expenditure on research and development is usually of capital nature and hence not deductible under the general deduction provisions of the IRO. Nonetheless, some provisions exist for tax deduction of research and development expenditure.

Qualifying research and development will be eligible for 300% tax deduction on the first HKD 2 million and 200% tax reduction on the rest, with no cap, provided some conditions are met.

Other relevant research and development expenditures (though not eligible for the enhanced deduction) will be allowed a standard 100% deduction.

Director’s Fee & Employee’s Remuneration

Normally, fees and other remunerations paid to directors / employees are deductible under the general deduction provisions of the IRO, if such payments are incurred in the production of assessable profits.

Nevertheless no salaries paid to a sole proprietor or any partners or partners’ spouses of a partnership business are tax-deductible for profits tax purpose.

Bad Debts

The IRD generally allows a tax deduction for bad debts (including provision for doubtful debts) that are proved to its satisfaction to have become bad. The deduction would only be allowed in respect of debts that were treated as trading receipts in calculating the assessable profits or debts in respect of money lent in a money lending business in Hong Kong.

Charitable Contributions

Charitable donations once approved are allowed provided the aggregate of such donations is not less than HKD 100. The deduction is capped at 35% of the taxable profits of the year of assessment.

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

Employer’s regular contribution to an employee’s MPF or ROR shall be tax deductible provided that they do not exceed 15% of the employee’s total emoluments.

Conversely, for special contributions (other than ordinary contributions to a MPF or ROR), a tax deduction will be given at 20% over five years.

Provision for Expenses

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

The determination of the incurrence of the provision for the expense is based on the fact that the taxpayer has a legal or contractual obligation to pay such an expense and such provision is made by a reasonably accurate estimate of the future liability.

However, general provision for expense is not tax-deductible due to the fact that it would not be regarded as “incurred” which is one of the requirements stipulated in the general tax deduction rule in the IRO.

Interest Expenses

For an interest expense to be deductible, apart from meeting the general deduction requirements under the IRO (i.e. it should be incurred in the production of assessable profits), the interest expense has to fulfill certain detailed conditions specified therein.

Thin capitalisation rule does not exist in Hong Kong, however, 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

However, foreign corporate income taxes are not generally deductible in Hong Kong as the IRD considers that income tax (like Hong Kong profits tax) is not an outgoing and expense incurred in the production of assessable profits (i.e. the general tax deduction provisions under the IRO), but is a charge on the profits.

However, other foreign taxes (e.g. value-added tax) that are not computed by reference to the profits may be deductible under the general deduction rules in the IRO. Foreign tax credit is available in some cases for foreign taxes paid under double tax treaties concluded by Hong Kong with other jurisdictions.

Tax Losses

Tax losses can be carried forward without any time limit to offset assessable profits in future but cannot be carried backward. Tax loss relief is not provided in Hong Kong within a group of companies.

Expenses Paid to Foreign Group Companies

Payments of royalties, service fees, management fees, etc. to foreign associated companies are deductible, provided that these expenses are of income nature and were incurred in the production of assessable profits.

Tax Incentives & Tax Reduction

  • Under the two-tiered profits tax rates regime, the first HKD 2 million of assessable profits earned is taxed at half of the normal profits tax rate (currently 8.25% for corporate and 7.5% for unincorporated businesses), provided certain conditions can be satisfied.
  • Corporations’ interest income and trading profits from qualifying debt instruments, which can include 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 subject to a lower tax rate of 8.25% or are exempt from tax depending on the tenure and issuance date of the debt instrument, as long as certain conditions are
  • If a corporation’s assessable profits are from the business of reinsurance as a professional reinsurer, or from the business of insurance as an authorized captive insurer, then such profits are  eligible to be taxed at 50% of the normal profits tax rate (i.e. 8.25%) subject to some conditions.
  • Authorized and some bona fide widely held mutual funds, collective investment schemes and unit trusts are tax exempt.
  • The assessable profits from eligible corporate treasury centers are taxed at 50% of the normal profits tax rate (i.e. 8.25%) if certain conditions are met.
  • Qualifying aircraft lessors and qualifying aircraft leasing managers are subjected to a concessionary tax rate at 8.25% on the assessable profits derived from the activities, subject to certain other conditions.
  • Profits derived from the qualifying ship lessors are exempt from profits tax while profits from the qualifying ship leasing manager are exempted from profits tax if the ship leasing services recipient are affiliated corporations or are taxed at the concessionary tax rate at 8.25% if the recipients are independent third party corporations given that certain other conditions are satisfied.
  • The profits realized from qualifying assets transactions and ancillary transactions thereto by entities being “fund” as per Section 20AM of the IRO are tax exempted if they meet all the prescribed conditions, regardless of the structure, size and place central management and control, i.e. onshore or offshore.
  • Non-resident entities are exempt from profits tax on profits derived from transactions in qualifying assets and the incidental transactions thereto, if they do not qualify as a “fund” under Section 20AM of the IRO, subject to certain conditions.
  • With effect 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 half of the normal tax rate, i.e., 8.25%.

Tax Deductions on Salaries Tax

Salaries tax is levied at the graduated rates of 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. The typical kinds of deductions and allowances are:

Expenses

Deductions in respect of 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 allowable for salaries tax purposes. In reality, the deductibility of expenses under salaries tax is quite limited, and only a few expenses are deductible.

Depreciation Allowance

Depreciation allowances may be granted on capital expenditure on plant and machinery, which is used in the production of the assessable income.

Contributions to MPF and ROR

Employee’s mandatory contribution to MPF and contributions to ROR are deductible for the purpose of determining one’s net assessable income. The percentage of deduction is however capped at a specified amount, which is currently HKD 18,000 for the year of assessment 2021/22.

Qualifying Annuity Premiums & Tax Deductible MPF Voluntary Contributions

Tax deductions are allowed for annuity premiums at the rate of one-fifth on a reducing balance basis and tax deductible voluntary contributions to MPF beginning from the year of assessment 2019/20.

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

The number of qualifying deferred annuity policy is not limited. Taxpayer may claim deduction for qualifying annuity premiums paid under one or more policies.

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

Deductions are granted to persons who have paid qualifying premiums under a Certified Plan of VHIS for himself/herself or his/her specified relatives for the year of assessment 2019/20. The maximum amount of tax deduction is HKD 8,000 per insured person for each year, and there is no limit to the number of specified relatives claimed by the taxpayer.

Charitable Donations

The tax treatment of approved charitable donations is that they are deductible but limited to 35% of the net assessable income.

Elderly Residential Care Expenses

The costs of the residential care home paid by a taxpayer or spouse for the parents or grandparents of the taxpayer are deductible but are limited to an annual deduction ceiling for each parent or grandparent. The maximum deduction ceiling is currently HKD 100,000 for each tax year.

Self-education Expenses

Self-education expenses (including tuition fees and the associated examination fees) paid for an approved course of education are tax deductible. The maximum deduction is at HKD 100,000 for each tax year.

Home Loan Interest Expenses

The home loan interest paid on the acquisition of a dwelling located in Hong Kong used as a place of residence may be claimed as a deduction from the assessable income up to HKD 100,000 in each year of assessment. The interest expenditure of the housing loan is deductible up to 20 years.

Personal Allowances

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

Tax Allowance - Personal Allowances

Foreign Taxes

Conditions apply for foreign taxes paid double taxation relief. Such relief will be provided either through exemption of the income that is subject to double taxation (if Hong Kong does not have a double tax treaty with the counterpart jurisdiction) or through the granting of tax credit (if such double tax treaty is in place).

How FastLane Group can Help?

Personal assessment may act as a relief for someone with income chargeable to profits tax and/or property tax. Under personal assessment, the income of office, employment and pension, unincorporated business profits and rental income from properties were to be accumulated. Tax is to be assessed on the aggregate amount of income in a manner similar to the computation of Salaries Tax.

The tax assessment election will allow individuals to deduct such allowances from their aggregated income, interest expenses on money borrowed to produce taxable property rental income and to set off the business tax losses suffered from their sole proprietorship / partnership business against the income from other sources.

FastLane Group would help you to ensure that you are fully taking advantage of the various tax allowances, deductions and incentives. Contact us now.