Computing Assessable Profits: Deductions, Allowances and Rules for Hong Kong Profits Tax
Guide to computing assessable profits for Hong Kong profits tax: deductions, non-allowable items and loss carry forward.
Computing Assessable Profits Hong Kong: Deductions and Rules
Start with the accounting profit from your Hong Kong Financial Reporting Standards financial statements. Adjust that figure. Add back non-deductible expenses and remove non-taxable income under the Inland Revenue Ordinance (Cap. 112). The result is your assessable profit for the year of assessment.
The year of assessment runs from 1 April to 31 March. Your basis period is normally the accounting period ending in that year. For a company with a 31 December year end, the basis period for the year of assessment 2023/24 is 1 January to 31 December 2023.
Hong Kong Assessable Profits Deductions
The Inland Revenue Ordinance permits a deduction for all outgoings and expenses incurred in producing assessable profits. These hong kong assessable profits deductions lower your tax liability.
Revenue expenses are costs directly tied to earning income: purchases, staff salaries, rent, utilities, professional fees and office supplies.
Bad debts are deductible once they become irrecoverable during the year, but only if they were previously included in assessable profits. A general provision for doubtful debts is not deductible.
Repairs and maintenance spent to keep assets in their existing condition qualify. Improvements that enhance an asset’s value do not.
Interest on money borrowed to finance business operations is deductible, subject to the sourcing rules.
Rent and rates for business premises and government rates are deductible.
Management fees paid to connected entities are deductible if they are at arm’s length and properly documented.
Research and development qualifying expenditure may attract a super-deduction of 200% to 300% under the R&D super-deduction regime.
All deductions require invoices, receipts, contracts and other records. The Inland Revenue Department will disallow deductions lacking documentary evidence.
Allowable Deductions Hong Kong Profits Tax
The allowable deductions hong kong profits tax are specified in sections 16 to 19 of the Inland Revenue Ordinance.
Depreciation allowances replace accounting depreciation, which is not deductible. Capital expenditure on plant, machinery, industrial buildings and commercial buildings qualifies. The depreciation allowances regime sets the rates and methods.
Pre-trading expenditure incurred in the 12 months before business commences is deductible in the first year of assessment.
Contributions to recognised retirement schemes are deductible up to 15% of employee remuneration. This includes employer contributions to Mandatory Provident Fund schemes and other approved schemes.
Donations to approved charitable organisations are deductible up to 35% of assessable profits, subject to a minimum of HK$100.
Patent and trademark registration fees for registering intellectual property rights in Hong Kong are deductible.
Exchange losses realised on revenue transactions are deductible.
Hong Kong Tax Computation Example
This hong kong tax computation example demonstrates the adjustments:
| Item | Amount (HK$) |
|---|---|
| Accounting profit per financial statements | 1,500,000 |
| Add: Depreciation charged in accounts | 200,000 |
| Add: Entertainment expenses (50% non-deductible) | 30,000 |
| Add: Private expenses | 10,000 |
| Add: Capital expenditure written off | 50,000 |
| Less: Depreciation allowances claimed | (180,000) |
| Less: Taxable interest income not included | (20,000) |
| Assessable profits | 1,590,000 |
Charge the assessable profits of HK$1,590,000 at the two-tiered rates: 8.25% on the first HK$2,000,000 and 16.5% on the remainder. For an unincorporated business, the rates are 7.5% and 15% respectively.
Non-Allowable Deductions Hong Kong
Section 17 of the Inland Revenue Ordinance specifies the non-allowable deductions hong kong.
Capital expenditure is not deductible. This covers acquiring fixed assets, improvements that extend an asset’s life or enhance its value, and capital losses.
Private or domestic expenses not incurred wholly and exclusively for business purposes are disallowed. Personal living costs fall squarely into this category.
Depreciation as per accounts is replaced by statutory depreciation allowances.
Fines and penalties for breaches of law, including tax penalties under sections 80 and 82A, are not deductible.
Dividends and distributions to shareholders are not deductible.
General provisions for future liabilities, such as warranty provisions, are disallowed unless the liability is specific and quantifiable.
Entertainment expenses are only 50% deductible. The full amount is deductible where the entertainment is for business and the recipient is outside Hong Kong.
Interest on capital paid on partners’ capital in a partnership is not deductible.
Rent paid to a connected person, a spouse or relative, may be disallowed if it is not at arm’s length.
Loss Carry Forward
A loss may be carried forward indefinitely. Set it off against future assessable profits from the same trade. Hong Kong has no group loss relief and no consolidated filing. Each company is assessed separately. A loss cannot be carried back.
Claim the loss carry forward by including the loss amount in the profits tax return for the year you intend to set it off. The IRD will verify the loss against the return from the loss-making year.
Territorial Source and Offshore Claims
Hong Kong taxes profits arising in or derived from Hong Kong. Profits sourced outside Hong Kong are not chargeable, regardless of the taxpayer’s residence. The IRD’s guidance on locality of profits is Departmental Interpretation and Practice Note 21 (DIPN 21).
If you consider some or all of your profits offshore, you must make an offshore claim. Support the claim with evidence showing the operations generating those profits were performed outside Hong Kong. The IRD examines the facts: where contracts are negotiated and concluded, where goods are purchased and sold, and where services are performed.
The territorial source principle interacts with transfer pricing rules. When a Hong Kong entity transacts with a connected entity, profits must be allocated on an arm’s length basis. If the connected entity is outside Hong Kong, the Hong Kong entity must ensure its profits reflect the functions performed, assets used, and risks assumed in Hong Kong.
Provisional Tax and Holdover
Profits tax is charged on the assessable profits of the year of assessment. The IRD also charges provisional tax for the following year, based on the preceding year’s assessable profits. Pay the provisional tax together with the final tax.
Apply to hold over payment of provisional tax on specified grounds: the assessable profits for the following year will be less than 90% of the preceding year’s profits, or the business has ceased or will cease. Make the application in writing before the payment due date.
Filing the Return
File the profits tax return on Form BIR51 for corporations, Form BIR52 for persons other than corporations, and Form BIR54 for non-resident persons. Supplementary forms S1 to S18 accompany the return where applicable. Returns are due within one month of issue. Where a tax representative is appointed, the IRD publishes a block extension letter setting later dates by accounting date.
Electronic filing is available through the Business Tax Portal and the Tax Representative Portal. Mandatory electronic filing began on 1 April 2026 for relevant entities of in-scope multinational enterprise groups, from the year of assessment 2025-26. The threshold follows the OECD Pillar Two rule of consolidated revenue of EUR 750 million or more. Electronic filers tag financial statements and tax computations in iXBRL. The IRD provides preparation tools.
Sources
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