The answer first
Under Hong Kong profits tax, a business can generally deduct outgoings and expenses incurred in the production of its chargeable profits. Expenses that are private, capital in nature, or unconnected with producing taxable profits are not deductible, unless a specific provision allows them. Good records are what turn a deduction claimed into a deduction accepted.
At a glance
- The test
- Incurred in producing profits taxable in Hong Kong
- Capital spending
- Not deducted directly; allowances and specific deductions apply
- Not deductible
- Private expenses; expenses relating to offshore (non-taxable) profits
- Essential
- A receipt and a note of business purpose
Usually deductible
| Expense | Notes |
|---|---|
| Rent and rates for business premises | Including management fees |
| Salaries, MPF and staff benefits | Employer contributions to recognised schemes, within limits |
| Professional fees | Accounting, audit, company secretarial, legal fees of a revenue nature |
| Marketing and advertising | Including digital marketing |
| Travel and entertainment | If for business purposes and properly documented |
| Interest | Subject to specific conditions on the borrowing and the lender |
| Bad debts | Proven bad trade debts previously included as income |
| Repairs | Revenue repairs, not improvements |
Usually not deductible
- Private or domestic expenses of owners and directors.
- Capital expenditure (except through specific allowances or deductions).
- Expenses relating to non-taxable income, such as offshore profits.
- Tax payments and most fines and penalties.
- Sums recoverable under insurance or indemnity.
Special deductions and allowances
| Item | General treatment |
|---|---|
| Plant and machinery | Initial and annual depreciation allowances |
| Manufacturing machinery and computer hardware and software | Specific provisions allow full deduction in the year of purchase, subject to conditions |
| Building refurbishment | Deduction spread over 5 years |
| Research and development | Enhanced deductions for qualifying spending |
| Purchase of certain intellectual property | Specific deductions subject to conditions |
Please confirmSpecific deductions have detailed conditions and anti-avoidance rules. Confirm eligibility with your tax adviser before relying on them.
Key takeawayKeep the receipt and a note of the business purpose for every significant expense. Without evidence, the Inland Revenue Department can disallow even genuine business costs.
Self-check: where do you stand?
| Question | If the answer is no |
|---|---|
| Do you keep receipts for every expense? | Use a document-capture routine |
| Are personal and business expenses separated? | Use separate cards and accounts |
| Are capital purchases recorded as assets? | Maintain a fixed asset register |
| Have you considered R&D or other special deductions? | Review eligibility |
How DBMS Global can help
- Bookkeeping that captures and classifies expenses correctly.
- Tax computations that claim the deductions available.
- Coordinating with tax specialists on enhanced deductions.
In summary
- Deductible if incurred in producing taxable profits.
- Capital and private costs are not deductible directly.
- Evidence is essential.
Official references
- Inland Revenue Ordinance (Cap. 112), sections 16 to 17 and related provisions
- Inland Revenue Department: Departmental Interpretation and Practice Notes, www.ird.gov.hk