Hong Kong Section 88 Charitable Exemption: Qualification Criteria and IRD Filing

Hong Kong Section 88 Charitable Exemption: Qualification and Filing

A charity recognised by the Inland Revenue Department under section 88 of the Inland Revenue Ordinance (Cap. 112) is exempt from profits tax, property tax and, in some cases, salaries tax.

Qualification Criteria for Section 88

To obtain section 88 exemption, an organisation must be established for charitable purposes only and operate for the public benefit. The IRD follows common law principles recognising four heads of charity: relief of poverty, advancement of education, advancement of religion, and other purposes beneficial to the community, such as health promotion, social welfare or environmental protection.

The organisation's governing document, typically its memorandum and articles of association or trust deed, must contain an object clause that limits its activities to charitable purposes. Any provision allowing private profit, distribution of assets to members or political activity will prevent approval.

Section 88 Hong Kong Charity: Application Process

Apply to the IRD using Form IR1238. The application must include a certified copy of the organisation's governing document, a detailed description of its objects and activities, the most recent annual accounts if the organisation has been operating, and a declaration that no part of its income or assets may be distributed to members or founders.

The IRD examines whether the organisation meets the charitable institution hong kong tax exemption test. If satisfied, it issues a letter confirming section 88 status and adds the organisation to the IRD register of charitable institutions.

IRD Section 88 Approval: What the IRD Checks

The IRD considers three core requirements.

1. Charitable objects only. The organisation's stated objects must fall within the recognised heads of charity. Any commercial or political objects disqualify it.
2. Public benefit. The activities must benefit a sufficient section of the public, not a closed group such as members of a private club.
3. No private profit. Income and assets must be applied solely to the charitable objects. No director, trustee or founder may receive a distribution of surplus.

The IRD may request additional information about the organisation's control structure, funding sources and actual operations before issuing approval.

Hong Kong Charity Tax Exemption: Effect on Taxes

Once approved, a charitable institution is exempt from:

• Profits tax on income derived from its charitable activities
• Property tax on rental income from property held for charitable purposes, provided the property is used in connection with carrying out the charitable objects
• Salaries tax on remuneration paid to staff, if the employee's duties are wholly and necessarily performed in carrying out the charitable objects.

The exemption does not apply to trading income. If a charity carries on a trade or business that does not directly further its charitable objects, the profits from that trading activity may be assessable. A charity that operates a commercial restaurant to generate revenue for its activities is likely to be taxed on the restaurant profits, unless the trade is ancillary to and carried out in the course of the charity's primary purpose.

Post-Approval Obligations: Annual Returns and Notifications

After receiving section 88 approval, a charitable institution must meet ongoing compliance requirements.

Annual return to the IRD. The IRD may request a copy of the charity's annual accounts and a statement of its activities. Although the IRD does not prescribe a standard form, file the annual return, together with audited financial statements, within a reasonable period after the end of each financial year.

Changes to objects or activities. Notify the IRD in writing of any change to the governing document, objects, trustees or key personnel. Failure to do so may result in the IRD revoking the section 88 exemption.

Update to the IRD register. The IRD maintains a public register of approved charities. Confirm that the registered details, including address and contact person, are current.

When Trading Income Remains Taxable

A charitable institution that engages in commercial trading should consider whether the income qualifies for exemption. The IRD distinguishes between three categories.

• Primary purpose trading. A trade carried out directly in furtherance of the charity's objects. A school charging tuition fees is trading, but the income is exempt because the trade is the charity's primary purpose.
• Ancillary trading. A trade incidental to the charity's primary purpose. The income may still be exempt if the trade is small in scale and directly supports the charitable objects.
• Unrelated trading. A trade separate from the charity's objects, such as selling general merchandise to raise funds. The profits are likely taxable.

Any charity with trading income should seek professional advice to determine whether it is assessable.

Ongoing Compliance and Record-Keeping

Maintaining section 88 exemption requires continuous compliance. Keep proper books of account and retain records for at least seven years. Prepare annual financial statements audited by a certified public accountant. File the annual profits tax return, Form BIR51 for corporate charities, Form BIR52 for unincorporated charities, by the deadline set by the IRD. Notify the IRD of any change of address, trustees or objects immediately.

The IRD may conduct periodic reviews. A charity that fails to meet the criteria may have its exemption revoked, exposing it to tax on past and future income.

Summary of Key Filing Points

For further guidance, consult the Inland Revenue Department's website at ird.gov.hk or speak to a tax adviser experienced in charitable institution hong kong tax exemption matters.