HK Profits Tax - Deductible/Non-deductible expenses

General section:
S.16(1), expenses incurred in the production of asseable profits, and
S. 17(1), expenses must NOT be capital in nature or for domestic or private purpose:

Exchange gain/loss: depends on whether the transaction giving rise the exchange difference is a revenue transaction or a captital transaction. *Deposit is treated as capital nature for normal company, while F.I. is treated as trading nature.

Payment to dimiss a director: The compensation payment made to dismiss a director is deductible. Although it is an "once-and-for-all" payment, there is no asset or enduring benefit created by the payment.

Interest payment: interest paid to bank (F.I., doesn't matter its interest income taxable or not) S16(2)(d), not secured by another deposit or loan, unless the interest from such deposit/loan is taxable to HK profits tax, or the borrower is not an associate or the borrower S16(2A), and the interest paid does not flow back to the borrower or its associate;

Interest income: It was taxable under Section 15(1)(f) and (g) if the interest income is derived from Hong Kong. The "provision of credit" test is used to determine whether the interest income is derived from Hong Kong. Since 22 June 1998, interest received from a hong kong F.I is exempt from payment of profits tax, except the deposit is used to secure a loan under Section 16 (2A);

Rent paid for the purpose of producing assessable profit: Paid to partner/partner's spouse under a Partnerhsip, deductible under S. 16(1)(b). *Paid to the proprietor is not deductible under a Sole-proprietorship business, paid to the spouse is deductible **No restriction (whoever is paid) under a corporation, as long as satisfy S.16(1) general section;

Bad debt - S.16(1)(d): Only specific trade debts which have been included as trading receipt, and proved to be bad to the satisfaction of the assessor are deductible. *general provision for doubtful debt is not deductible. **recovery of bad debt which has been allowed previously is assessable in the year of assessment when the bad debt is collected S16(1)(d)(ii);

Repair - S.16(1)(e): repairing expenditure is deductible as it is revenue in nature. "Repair" is to reinstall an asset back to its original status.

Legal expenses: Look at the nature of the transaction. *Lease - expenses incurred incurred in connection with the first letting of an immovable property are not deductible, capital in nature. Expenses incurred for the renewal of leave is deductible.

Audit fee: Deductible

Special deductions:
Initial contribution - S. 16A: initial contribution is deductible by five equal annual instalment (although is of a capital nature, "once-and-for-all payment" and an enduring benefit being created);

Research & Development - S.16B: expenditure on research and development related to a trade or a business, including capital expenditure (except to the extent that is an expendure on land or buildings or on alternations, additions or extensions to buidlings) are deductible;

Donation - S.16D: a person liable to profits tax may deduct the his/her approved charitable donation in a year of assessment from his/her assessable profit. It must be a cash donation;

Purchase and sale of patent rights - S.16E: Capital in nature and non-deductible under S.17(1)(c), however, the Purchase of patent rights or know-how rights for use in Hong Kong in the production of assessable profits is deductible as long as not purchased from an associate.

Expenditure on buidling refurbishment - S.16F: notwithstanding anything in Section 17, capital expenditure incurred on the renovation or refurbishment of a building or structure other than a domestic building or structure may claim the expenditure as an outgoing or expense incurred in the production of assessable profit. Alloed in 5 equal annual instalment.


Non-deductible:
Tax paid - S. 17(1)(g): Property tax and profits tax paid/payables are not deductible. Salaries tax paid/payable to partner/sole-proprietor/their spouses are not deductible. Salaries tax paid/payable for the remuneration of an employee or a director is deductible;

Improvement - S. 17(1)(d): cost of any improvement is not deductible. Purchase and decorate an office is an example of improvment. Re-decorate an office which has been used for few years is an example of repair S.16(1)(d). However, decoration of an office is subject to specific deduction under S.16(F).