In Hong Kong, the Inland Revenue Ordinance (IRO) governs the deductibility of business expenses for Profits Tax purposes. The general principle is that expenses must be wholly, exclusively, and necessarily incurred in the production of assessable profits to be deductible.
Deductible Expenses
| Expense Type | Description | Conditions/Requirements | Relevant Law |
|---|---|---|---|
| Operational Costs | Rent, utilities, office supplies, repair and maintenance, travel expenses (business-related only). | Must be incurred solely for business purposes, reasonable in amount, and supported by proper documentation. | Section 16(1) of the Inland Revenue Ordinance (IRO) |
| Employee Salaries and Benefits | Wages, salaries, bonuses, commissions, MPF contributions, medical insurance, staff welfare. | Must be reasonable in amount and incurred in the course of employment. | Section 16(1) of the IRO |
| Bad Debts | Debts that are irrecoverable. | Must be written off in the accounts and relate to trade debts. | Section 16(1)(d) of the IRO |
| Depreciation | Wear and tear of tangible assets like machinery, equipment, and buildings. | Must be calculated based on the Inland Revenue Department's depreciation rates. | Section 16(1)(c) of the IRO |
| Research and Development (R&D) Expenses | Costs incurred for qualifying R&D activities conducted in Hong Kong. | Must meet specific criteria and be pre-approved by the Innovation and Technology Commission. | Section 16F of the IRO |
Non-Deductible Expenses
| Expense Type | Description | Rationale for Exclusion | Relevant Law |
|---|---|---|---|
| Domestic or Private Expenses | Personal living expenses, family expenses, etc. | Not incurred in the production of assessable profits. | Section 17(1)(a) of the IRO |
| Expenses Not for the Purpose of Trade | Expenses for activities unrelated to the company's trade or business. | Not incurred in the production of assessable profits. | Section 17(1)(b) of the IRO |
| Capital Expenditure | Costs incurred for acquiring or improving fixed assets. | Treated as capital in nature, not revenue expenditure. | Section 17(1)(c) of the IRO |
| Fines and Penalties | Fines for legal violations or penalties imposed by government authorities. | Not incurred in the production of assessable profits and discourage illegal activities. | Section 17(1)(e) of the IRO |
Expenses with Limitations on Deductibility
| Expense Type | Limitation | Relevant Law |
|---|---|---|
| Entertainment Expenses | 50% of the expenditure is deductible. | Section 17(2)(k) of the IRO |
| Motor Vehicle Expenses | Deduction for private use must be added back to assessable profits. | Section 17(2)(mb) of the IRO |
| Tax Reserves | Deductions are subject to specific rules and may be disallowed if excessive. | Section 16(2) of the IRO |
| Expenses Paid to Related Parties | Must be on an arm's length basis and not excessive. | Section 16(2) of the IRO |
| Lease Reinstatement Costs (New for 2024/25) | Tax deduction allowed for costs incurred to reinstate leased premises to their original condition. | Section 16 of the IRO (amendment) |
| Industrial and Commercial Building Allowances (2024/25 onwards) | Time limit for claiming allowances for industrial and commercial buildings and structures has been removed. | Section 16 of the IRO (amendment) |
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