Every year, many Hong Kong SME owners have a headache when it comes to the tax filing season. In fact, although the tax system in Hong Kong is simple, as long as you know how to make good use of the "Deductible Expenses" in the Inland Revenue Ordinance, you can legally save a large amount of Profits Tax for your company.
Whether you've just finishedOpen CompanyWhether you are a business owner or a well-established organization that has been in business for many years, knowing what expenses are tax deductible is a must for every business manager. As a licensed professionalSecretary CompanyM&N has put together a "Profits Tax Deduction Lazy Person's Pack" to teach you how to file your tax return smartly!
1. IRD Tax Deduction Principles: What is "Deductible Expenses"?
The Inland Revenue Department (IRD) of Hong Kong adopts a "principle-based" rather than an itemized list. According to section 16 of the Inland Revenue Ordinance (IRO), an expense is deductible in principle provided that it meets the following conditions at the same time:
Arising for the purpose of generating assessable profits: This money must be spent for the purpose of running the business and making money for the company.
Non-capital in nature: General operating expenses can be deducted directly, while capital expenditure (e.g. purchase of shop space, purchase of large machinery) has to be dealt with through "depreciation allowances".
There is a list of evidence: Clear documentation and accounting records must be kept.
2. common deductible company operating expenses
The vast majority of expenses that are directly related to your business are tax deductible in your day-to-day operations. The following are common examples:
Office expenses: Rent, utilities, telephone and internet charges. If you want to save money at the beginning and rentVirtual OfficeThe annual fee for the service is also fully tax deductible.
Employee Compensation and Benefits: Wages, bonuses, allowances, severance payments and the employer's portion of Mandatory Provident Fund (MPF) contributions paid to employees.
Catering expenses: This is the most common area of dispute among SMEs. Treating guests to meals and giving gifts to customers are definitely tax deductible, but the tax deduction forRecords must be clear(e.g. write down on the back of the receipt which client of which company was invited to the banquet and what items were discussed), otherwise it will be easily struck out by the Inland Revenue Department.
Professional Service Fee: Costs of seeking external professional assistance, e.g. commissioning M&NAccounting & TaxationThe fees for services, audits, legal advice, etc., are not included in the list of fees and charges.
Intellectual Property Rights and Security: for the protection of the company's brandTrademark RegistrationThe cost of the insurance and workers' compensation insurance for the employees are also covered.
3. What are the tax deductions for computers, cars and renovations? (Capital Expenditures)
Many bosses mistakenly think that money spent on air-conditioners and company cars can be deducted as expenses in one go. In fact, these are "capital expenditures" and need to be deducted in the following two ways:
Depreciation Allowance for Fixed Assets: Purchase of office equipment (e.g. computers, furniture), company cars, etc., and enjoy up to $10,000 in the first year. Initial Tax Exemption for 60%The remaining costs are deducted as declining depreciation at the rate of 10%, 20% or 30% per year.
Commercial Building Allowance (CBA): If you carry out interior decoration (e.g. false ceilings, partition walls) for your office or factory, the cost of these works is subject to a deduction of 4% per annum, amortized over 25 years.
(M&N Pro Tip: Remember to separate "Renovation Work" from "Purchase of Furniture and Equipment" when posting your accounts, as the depreciation deduction for equipment is much faster than that for renovation!)
4. these items are "non-deductible"! Common Mistakes Made by SMEs
In accordance with section 17 of the Inland Revenue Ordinance, the following expendituresunacceptableIt is used as a deduction for profits tax purposes:
The boss's personal and household expenses (e.g. the boss's personal supermarket shopping list).
Traffic violation fines or fines for any violation of the law.
Non-mandatory MPF contributions (in excess of the statutory limit or as specified in special ordinances).
Salary and interest paid to proprietors or partners (and their spouses) in a sole proprietorship or partnership.
Let M&N be your strongest business partner!
Filing a tax return is not just a matter of filling out a few forms, it is also a matter of cash flow for your company. Getting the accounts wrong will not only result in paying more tax, but may also result in fines from the Inland Revenue Department.
M&N We provide one-stop professional business services. Not only do we help entrepreneurs get off to a painless start, we also have an experienced accounting team to take care of the tedious accounts and tax returns. Focus on your core business and leave the tedious paperwork and numbers to us!
Contact M&N today for a free initial tax consultation!
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Frequently Asked Questions (FAQ)
Answer: There is no specific upper limit on the amount of money that can be claimed under the tax law, but the prerequisite is that it is "reasonable" and "directly related to the business". As long as you can show sufficient proof (documents and business records) that the expenses were incurred for the purpose of generating business, you can file a tax return regardless of the amount.
Answer: Depends on the situation. If you are making a capital contribution through a Hong Kong companyOpen Overseas Company或Open an offshore companyThese are generally capital investments and are not directly deductible for profits tax in Hong Kong. However, profits generated by overseas companies are generally not subject to Hong Kong profits tax (offshore exemption) as long as they are not sourced in Hong Kong. It is advisable to seek professional tax advice on the specific structure.
Answer: A newly established company will normally receive its first profits tax return from the Inland Revenue Department (IRD) in the 18th month after its establishment. Upon receipt, it is normally required to be submitted together with the audited financial statements (auditor's report) within 3 months.
Answer: The best way to do this is to start withBank Account OpeningWe keep a clear distinction between public and private affairs, and keep all monthly statements and invoices properly. Hire a professional team to evaluate the company's financial position before the year-end.
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