A company’s corporate tax is the amount charged on the entity’s assessable profits. These profits can be calculated by making several adjustments to the profit and loss statement of the organization for a particular period.
In Hong Kong, expenses incurred in the calculation of tax that is non-capital are referred to as tax-deductible expenses. There are certain rules guiding the treatment of these expenses.
Before filing your tax for the government, you need to learn about these rules and how they affect the corporate tax system. That’s where we come in. This article has everything you need to know about Hong Kong Profit Tax deductible expenses.
How To Calculate Hong Kong Profit Tax
As mentioned earlier, an organization’s corporate profit tax is usually obtained after several adjustments have been made to its profit or loss account information.
Before you begin calculating Hong Kong Profit Tax deductible expenses, it’s important that you can identify company income and expenses.
According to Hong Kong Law, the net income of a company can include any or more of the following:
- Royalties received for intellectual property
- Profits generated by carrying out business activities in Hong Kong
- Rent generated from leasing movable property
- Income generated as interest on loans or investments
- Any financial aid in the form of grants, subsidies, etc
- Gains earned from bills of exchange or certificates of deposit
- Any refunds on pension scheme contributions
- Receipts from an exhibition, use of films, tapes or recordings
More information on expenses in a profit or loss account will be shared later. After all income and expenses have been identified, the next thing to do is calculate corporate tax. To do that, take note of the following steps:
1. Deduct Non-Assessable Profits
The first thing to do is to identify all non-assessable profits and remove them from the entity’s net income.
Profits that fall into this category include:
- Any profit that was not generated from business activities in Hong Kong
- Any returns gained from the sale of capital assets
- Dividends or profits that have been previously assessed.
- Any interest income generated a deposit that was carried out in Hong Kong. This does not usually include interest received or paid to a financial institution.
- Other sources of income that are classified under the provisions of the Hong Kong Inland Revenue Ordinance
2. Deduct Hong Kong Profit Tax Deductible Expenses
The next thing to do is remove any tax-deductible expenses from the remaining amount. Hong Kong tax deductible expenses are those incurred while running the business and generating profits.
However, make sure to leave out non-deductible expenses. You’ll get more information on tax-deductive and non-deductible expenses later in this piece.
3. Deduct Utilized Losses
Losses incurred during the running of a business may either be deducted directly during that year or carried forward and deducted from subsequent years.
To classify as deductible, the losses must have been incurred while performing business operations in Hong Kong.
4. Add Balancing Charges
Balancing Charges are described as those charges incurred when the sales value of a capital asset exceeds its tax written down value. This asset may include plants, buildings, machinery, or structures.
5. Deduct Capital Allowances
The last item left to treat is capital allowances. These allowances are available for business premises or machinery used during production and profit-making.
According to Hong Kong Law, there are several capital allowances, and business owners should be aware of each.
What Classifies As Hong Kong Profit Tax Deduction Expenses?
According to Section 16 (Ascertainment of chargeable profits) of the Inland Revenue Ordinance (“I.R.O.”), any outgoing expenses incurred by the company in the production of chargeable profits are tax deductible.
However, these expenses must be incurred during the production of profits for the assessment year.
The expenses in this category include;
- Any expenses associated with lending money
- Rental expenses. Any amount paid for occupying a building or land to generate profits or revenue
- Foreign taxes charged on income
- Any irrecoverable debts or bad debts written off
- Any expenses that are incurred for repair, replacement of machinery, equipment or premises, and refurbishment
- Any expenses incurred for patent registration, and trademark
- Any expenses related to retirement scheme contributions
- Any expenses on research and development
- Any expenses incurred on technical education
- Any charitable donations made to non-profit organizations
- Any expenses incurred in the purchase of copyrights, trademarks, patents, and design registration
- Any capital expenses on fixed assets, machinery, and environmental protection
What Are Non-Deductible Expenses?
As mentioned earlier, expenses spent in the production of income tax are referred to as Hong Kong profit tax deductible expenses. However, the following expenses are not tax deductible.
- Private or domestic expenses
- Any expenses that were not incurred in the production of profits
- Any expenses incurred in making improvements to an asset
- Any sums recovered due to insurance contracts of indemnity
- Any expenses incurred on tax except employee’s salaries tax
- Any capital expenses classified as non-deductible according to section 17 of the Hong Kong Inland Revenue Ordinance
- Any expenses incurred on payments to partners and spouses
- Any expenses about a landed property that are not used as a revenue stream for the business
Risk of Over-Claiming Hong Kong Profit Tax Deductible Expenses
There are instances when a person may be involved in over-claiming. This occurs when a person attempts to make too many claims of business expenses, including those not directly related to running the business.
When this happens, the auditor will request justifications or a means of evidence to support the claim. If the business fails to provide the necessary information, this lack of disclosure could be included in the audit report.
Remarks on overclaiming would tarnish the organization’s image and may make it more difficult to apply for finance. Therefore, all businesses should have evidence and justification for their expenses.
How Can We Help
Handling and reporting corporate tax is crucial to the long-term success of a business. That’s why most businesses do not take it lightly.
But the truth is that it may be difficult to follow up with tax payments and calculations while running other aspects of the business, especially for small organizations. Now, that’s where we come in.
SJH Global is a top-rated business consultancy firm. We can handle your tax reporting and calculation obligations for you. We’re committed to helping every organization run smoothly and efficiently without suffering sanctions from the law.
Our team of experts will function like your accounting team and ensure the entire process is seamless.
Hong Kong Profit Tax Deductible Expenses - Frequently Asked Questions
The amount you’ll pay as corporate profit tax depends on the amount of assessable profits. An organization will be subject to a tax rate of 8.25% on assessable profits of up to $2,000,000. But they may also pay tax at 16.5% for profits more than $2,000,000.
In Hong Kong, all private sector companies are expected to pay corporate profit tax.