When filing taxes in Hong Kong, not all business expenses are treated equally. Some costs can reduce your taxable income, while others cannot. To stay compliant and avoid paying more tax than necessary, it’s important to know the difference between deductible and non-deductible expenses.
Deductible expenses can be subtracted from your business income, lowering the amount of tax you need to pay. Non-deductible expenses cannot be used to reduce your taxable income; even if they are business-related, they remain fully taxable.
Misclassifying these expenses can lead to missed deductions or issues with the Inland Revenue Department (IRD). Getting it right helps avoid trouble and keeps your tax bill under control.
Deductible vs Non-Deductible: What’s Their Difference
When working out which business expenses can be deducted for tax purposes, the key is whether the expense is business-related and reasonable.
Deductible expenses are usually tied directly to running the business. These include things like office rent, staff salaries, advertising, work travel, materials, and software subscriptions. If the expense supports daily operations or helps generate income, it likely qualifies.
Non-deductible expenses, on the other hand, are costs that don’t directly relate to core business activities. These could include personal car payments, certain home office costs, and some meals or entertainment. Even if they benefit the business in some way, they might not be allowed as deductions.
Some expenses fall into grey areas or have limits. For example, only 50% of meals and entertainment may be deducted, even if they’re business-related.
Knowing what you can and can’t deduct helps reduce tax risks and avoid missed opportunities. When in doubt, it's best to check with a tax advisor who understands the rules for your specific case.
How Hong Kong Businesses Identify Deductible Expenses
In general, if a business expense is incurred to help generate income and is not capital in nature, it is likely to be deductible. Hong Kong businesses usually follow their accounting records to calculate profits, but adjustments may be needed to comply with tax rules.
For example:
- Accounting depreciation is not deductible; instead, businesses must use tax depreciation allowances.
- Provisions for doubtful debts are not deductible unless specific conditions are met.
- Interest expenses must meet certain conditions to be deducted, particularly if paid to non-Hong Kong lenders.
To be safe, businesses should review their expenses regularly and consult a tax advisor when needed.
Types of Expenses
General Operating Expenses
| Deductible | Non-Deductible |
|---|---|
| Employee salaries and wages | Starting a business (like registration fees) |
| Electricity and internet bills | Buying equipment or other big items (capital costs) |
| Rent for office or workspace | Personal or home-related expenses |
| Employee bonuses and allowances | Money spent on improving buildings |
| Repairs to tools, machines, or equipment | |
| Paying for accounting or tax help |
Organizational Research and Development (R&D) Expenses (From April 1, 2018)
| Deductible | Non-Deductible |
|---|---|
| 100% for Type A expenditure | R&D activities outsourced outside Hong Kong or to individuals |
| 300% for Type B expenditures up to the first HK$2 million, and 200% thereafter | R&D conducted for another party or without rights over the activity |
| R&D expenses directly related to the trade, profession, or business | R&D supported by the government or any individual other than the taxpayer |
Type A Expenditure
Organizational and other expenses related to R&D that do not qualify for enhanced deductions.
Example: Capital expenditure on R&D plant and machinery.
Type B Expenditure
Expenditures on R&D activities involving:
- Natural/applied sciences to extend knowledge
- Original and planned investigation for scientific or technical knowledge
- Applying knowledge to develop new/improved products, processes, or systems before commercial production
Depreciation of Buildings, Equipment & Assets
| Deductible | Non-Deductible |
|---|---|
| 20% deduction in the first year, and 4% each year after for industrial buildings you use | Assets bought as part of goodwill or brand value |
| 4% yearly deduction for commercial buildings you use | Amortization (spreading out payment) of goodwill |
| 60% first-year deduction and 10–30% yearly depreciation for plant and machinery |
Debt, Interest, and Taxes
| Deductible | Non-Deductible |
|---|---|
| Bad debts (loans you made in Hong Kong that were never paid back) | Foreign taxes |
| Interest paid to companies (local or overseas) if they pay profits tax in Hong Kong | Interest paid to companies outside Hong Kong not subject to local tax |
| Legal fees and charges for borrowing money (if linked to business income) | If the loan wasn’t part of a licensed money lending business |
| Capital losses (losses when selling investments or assets) | |
| Interest on investments | |
| Hong Kong tax payments (except salary tax paid for employees) |
Charitable Donations
| Deductible | Non-Deductible |
|---|---|
| Donations to charities approved by the Hong Kong government | Donations under HK$100 |
| Up to 35% of your profit can be deducted for these donations | Donations to organizations not approved by the local authorities |
Salaries and Pension Contributions
| Deductible | Non-Deductible |
|---|---|
| Payments to MPF (Mandatory Provident Fund), pensions, or retirement funds for employees | Contributions that are more than 15% of the employee’s total salary |
| Special fund payments under the law (spread over 5 years) | Salaries, benefits, or payments made to yourself, business partners, or their spouses |
| Director fees and payments (if reasonable and related to business) |
Environmental Protection Expenses
| Deductible | Non-Deductible |
|---|---|
| 100% of the cost for installing environmental protection equipment | NA |
| 100% of the cost for buying eco-friendly vehicles |
Special Deductions for Business Improvements
| Deductible | Non-Deductible |
|---|---|
| 20% yearly deduction for refurbishing your business location | Expenses to maintain buildings not used for business or making profit |
| 100% deduction for buying computer hardware and software | Money received from insurance or indemnity (you can’t deduct what’s refunded) |
| Money spent registering trademarks, designs, or patents | |
| Costs of getting patents, know-how, or certain tech rights (if conditions are met) |
Fines, Penalties, and Other Non-Deductible Items
| Deductible | Non-Deductible |
|---|---|
| Fees paid to foreign entities for royalties or services | Fines and penalties, such as legal or government fees for breaking rules |
| Losses from taking capital out of your business (like withdrawing your own investment) |
Conclusion
Knowing which expenses are deductible helps reduce your tax bill and avoid issues with the IRD. Since tax rules in Hong Kong can be complex, it’s best to get expert advice.
Air Corporate offers reliable tax and accounting services for businesses in Hong Kong.
Contact us to stay compliant and make the most of your deductions.
