- An expense is deductible to the extent it’s incurred in producing profits chargeable to Profits Tax. Capital and private spending are not.
- Every HK$1 you deduct saves 8.25 or 16.5 cents for a company (7.5 or 15 cents for an unincorporated business), depending on which tier the profit falls in.
- Some spending gets more: 300% on the first HK$2 million of qualifying in-house R&D, and a 100% first-year write-off for computer hardware and software.
- Employer MPF contributions are capped at 15% of each employee’s pay, and approved donations at 35% of assessable profits.
- Keep records for at least seven years. A deduction you can’t prove is a deduction the IRD can disallow.
Hong Kong Profits Tax is charged on what’s left after your deductible business expenses, so every expense you miss is taxed as profit. On HK$3 million of profit, missing HK$100,000 of deductions costs a company HK$16,500 in extra tax.
The opposite mistake is just as expensive: claiming something the IRD treats as capital or private, then paying it back, possibly with a penalty, after an IRD enquiry. Tax filing support catches both before your return goes in.
In this guide, you’ll learn:
- The test the IRD uses to decide whether an expense is deductible
- Which expenses are deductible, which get extra deductions and which never are
- How depreciation allowances work, and how deductions turn your accounting profit into assessable profit
- What records to keep and how to set up your accounts
- The five reasons the IRD most often disallows a claim
What makes a business expense tax deductible in Hong Kong?
Under section 16 of the Inland Revenue Ordinance (Cap. 112), an expense is deductible to the extent it’s incurred in producing profits chargeable to Profits Tax during the basis period. Section 17 then rules out specific items, mainly capital spending and private or domestic expenses.
In practice, ask three questions about each expense:
- Did it help earn chargeable profits? Spending linked to offshore profits that aren’t taxed in Hong Kong isn’t deductible either.
- Is it a running cost, not a capital purchase? Rent and repairs are running costs. Buying a car or renovating beyond the original condition is capital.
- Is it business, not private? If it’s both, only the business share counts.
The words “to the extent” matter. Unlike the UK’s “wholly and exclusively” test, Hong Kong lets you apportion a mixed-use cost. If a car is used two-thirds for business, the IRD allows two-thirds of its running costs.
Revenue of HK$2 million minus HK$1.2 million of deductible expenses leaves HK$800,000 of assessable profit. It's all in the first tier, so a company pays 8.25%: HK$66,000. Under the two-tiered profits tax rates, only one company in a group of connected entities can claim the lower first tier.
Which business expenses are deductible?
Most day-to-day running costs are deductible, as long as they’re for the business and you can prove them. Here’s what typically qualifies, by category.
Staff costs
- Pay: salaries, wages, commissions, bonuses and allowances, including directors’ remuneration.
- MPF: employer contributions, mandatory and voluntary, up to 15% of each employee’s total emoluments.
- Leaving payments: severance and long service payments.
- Hiring and training: recruitment agency fees and staff training.
Premises
- Rent: for offices, shops and warehouses used to earn profits, and quarters provided to employees.
- Running costs: electricity, water, phone, management fees and government rates.
- Repairs: restoring premises, plant or equipment to their original condition. Improvements are capital.
Professional and finance costs
- Professional fees: accounting, audit, bookkeeping, company secretary and consultancy fees.
- Legal fees: for running the business, such as debt collection or contract disputes.
- Loan interest: deductible only if the conditions in section 16(2) are met, for example when you borrow from a financial institution. Interest on loans from a director or related company needs a closer check.
- Bad and doubtful debts: amounts you counted as income that turn out to be uncollectable, or that you estimate specifically won’t be paid.
Trading and marketing
- Stock: goods for resale, raw materials and freight inwards.
- Marketing: advertising, digital marketing, PR and sponsorship.
- Business entertainment: client meals and events. Hong Kong sets no cap, but you need to record who attended and why.
- Business travel: flights, hotels and local transport for business trips.
- Software subscriptions: SaaS tools paid monthly or annually.
Which expenses get extra or accelerated deductions?
Some spending gets a bigger deduction than you paid, or a full deduction in year one instead of depreciation over time.
| Expense | Deduction | Conditions |
|---|---|---|
| In-house R&D or payments to a designated local research institution (Type B) | 300% on the first HK$2 million, 200% above | R&D wholly carried out in Hong Kong and related to your business |
| Other qualifying R&D (Type A) | 100% | For example, payments to an overseas university |
| Computer hardware, software and manufacturing machinery | 100% in the year of purchase | Not available for leased or hire-purchase items |
| Renovating non-domestic premises | 20% a year for five years | Capital spending on refurbishment, not repairs |
| Approved charitable donations | Up to 35% of assessable profits | At least HK$100, to an approved charity |
R&D example: your company spends HK$3 million on in-house R&D in Hong Kong. The first HK$2 million is deducted at 300% (HK$6 million) and the remaining HK$1 million at 200% (HK$2 million). That’s a HK$8 million deduction for HK$3 million of spending.
How do depreciation allowances work for business assets?
You can’t deduct the cost of a capital asset as an expense. Instead, you claim depreciation allowances, which spread the deduction over the asset’s life. Your accounting depreciation is added back and replaced with these.
| Asset | Initial allowance (year of purchase) | Annual allowance |
|---|---|---|
| Plant and machinery | 60% | 10%, 20% or 30% of the reducing value, by pool |
| Industrial buildings | 20% | 4% of cost |
| Commercial buildings | None | 4% of cost |
Plant and machinery are grouped into pools by rate. For example, air-conditioning plant goes in the 10% pool, furniture and refrigerators in the 20% pool, and motor vehicles in the 30% pool. If you sell an asset for more than its reduced value, the difference is taxed as a balancing charge.
Example: you buy HK$100,000 of office furniture, which goes in the 20% pool. In the year of purchase you claim both allowances:
- Initial allowance: 60% × HK$100,000 = HK$60,000
- Annual allowance: 20% × the remaining HK$40,000 = HK$8,000
- Total first-year deduction: HK$68,000, with HK$32,000 carried forward at 20% a year
If an asset is partly used privately, such as a car, the private share of the allowances is taken off.
Which business expenses are not deductible?
Anything capital, private or tax-related is out. These are the items the IRD disallows most often.
- Capital spending: buying fixed assets (claim depreciation allowances instead), improvements beyond original condition, and losses on selling fixed assets.
- Private and domestic costs: personal meals, medical bills, family insurance, commuting from home to your usual workplace, and the private share of a car or phone.
- Payments to yourself in an unincorporated business: a sole proprietor’s or partner’s own salary, drawings, and interest or rent paid to them.
- Taxes, fines and penalties: Profits Tax itself, and any fine or penalty, including late filing penalties.
- General provisions: a blanket provision for doubtful debts. Only specific debts estimated to be bad qualify.
- Excess retirement contributions: employer MPF above the 15% cap.
- Insured losses: any loss you can recover under an insurance policy.
- Pre-trading costs: company formation and set-up costs, and expenses before your business started trading, are generally not deductible.
How do deductions turn your accounting profit into assessable profit?
The IRD starts from the profit in your financial statements, adds back anything that isn’t deductible, then takes off allowances that aren’t in your accounts. The result is your assessable profit.
| Step | Item | HK$ |
|---|---|---|
| Start | Net profit per the accounts | 900,000 |
| Add back | Depreciation charged in the accounts | 50,000 |
| Add back | Fines and penalties | 5,000 |
| Add back | Private share of car running costs | 15,000 |
| Less | Depreciation allowances (from the furniture example above) | (68,000) |
| Result | Assessable profit | 902,000 |
| Tax | 8.25% (all within the first HK$2 million) | 74,415 |
This is the same order the IRD uses in its pro forma profits tax computation. Getting the add-backs right is where most of the work is, which is why separating non-deductible accounts in your books saves time.
Deductible or not? Common expenses at a glance
| Expense | Deductible? | Why |
|---|---|---|
| Office rent | Yes | Premises used to earn profits |
| Client dinner | Yes | Business entertainment, if you record attendees and purpose |
| Staff bonus | Yes | Part of employees’ pay |
| Employer MPF | Yes, up to 15% | Capped at 15% of each employee’s pay |
| New laptop | Yes, 100% in year one | Prescribed fixed asset, if bought, not leased |
| Company car | Partly | Depreciation allowances plus the business share of running costs |
| Office renovation | Over five years | 20% a year |
| Repairing the air-con | Yes | Restores original condition |
| Donation to an approved charity | Yes, up to 35% | Capped at 35% of assessable profits |
| Company incorporation fee | No | Capital, pre-trading cost |
| Late filing penalty | No | Fines and penalties are never deductible |
| Profits Tax paid | No | Tax on profits isn’t an expense of earning them |
What records does the IRD expect you to keep?
Section 51C of the Inland Revenue Ordinance requires you to keep business records for at least seven years from the transaction date, even after the business closes. If you claim it, you need to be able to prove it.
- Invoices and receipts: showing the supplier, date, description and amount.
- Bank and card statements: confirming the money actually left the business.
- Contracts: tenancy, employment and loan agreements for large or recurring costs.
- Payroll records: salaries, bonuses and MPF remittance statements.
- Expense claims: with the business purpose and, for entertainment, who attended.
- Books of account: a general ledger that ties every deduction back to its evidence.
Digital records are fine, as long as they’re complete and you can retrieve them when the IRD asks.
How should you set up your chart of accounts for tax deductions?
Use a standard chart of accounts, then give each tax-sensitive cost its own account instead of folding it into a general expense line. Your accountant can then find every add-back in minutes, without going back through receipts. The IRD doesn’t prescribe a chart of accounts, so any structure works as long as your books support your return.
These are the accounts worth keeping separate in a Hong Kong company’s books:
| Example account | Tax treatment | Why keep it separate |
|---|---|---|
| 6150 Employer MPF | Capped | Deductible up to 15% of each employee’s pay |
| 6420 Entertainment | Deductible with records | Needs attendee and business purpose notes |
| 6500 Motor vehicle expenses | Apportioned | The private-use share is added back |
| 6700 Depreciation | Added back | Replaced with depreciation allowances |
| 8100 Charitable donations | Capped | Approved charities only, up to 35% of assessable profits |
| 8200 Interest, related parties | Conditional | Must meet the section 16(2) conditions |
| 8300 Fines and penalties | Added back | Never deductible |
| 8900 Income tax expense | Added back | Profits Tax isn’t deductible, so it sits below profit before tax |
Capital spending doesn’t go in an expense account at all. Computers, furniture, vehicles, renovations and the legal fees for buying an asset are recorded as fixed assets on your balance sheet, and you claim depreciation allowances on them instead.
Rather not set this up yourself? Sleek’s accountants keep your books coded this way every month. See accounting and tax plans.
Why does the IRD reject deduction claims?
No receipt or evidence
Without an invoice or receipt, and proof of payment, the IRD can disallow the expense. A bank statement alone shows you paid, not what you paid for.
Private use that isn’t apportioned
Claiming 100% of a phone, car or home internet that’s partly personal invites an adjustment. Claim only the business share and keep a note of how you worked it out.
Capital spending claimed as an expense
Vehicles, major renovations and equipment belong in fixed assets, with depreciation allowances or the special write-offs. Expensing them in full overstates your deductions, and the IRD will adjust it.
Business purpose not recorded
A restaurant receipt doesn’t prove a client meeting. Note who attended and what it was for, at the time, not when the IRD asks.
Interest that doesn’t meet section 16(2)
Interest on loans from shareholders, directors or overseas related companies doesn’t qualify automatically. Check the section 16(2) conditions before you claim, and keep the loan agreement and proof the money was used in the business. Related-party interest is the kind of item an IRD tax audit looks at closely.
When can you handle your own deductions?
- Your business is small, with one bank account and simple running costs.
- You have no capital purchases this year, apart from a few laptops or software licences.
- You don’t pay interest on loans from directors or related companies.
- You don’t claim R&D, offshore profits or losses from earlier years.
- Your books are kept monthly and every expense has a receipt.
If that’s you, the categories and tables above will cover almost everything in your computation.
When should an accountant review your deductions?
- You bought vehicles, machinery or renovated premises this year.
- You’re claiming the 300% R&D deduction or an offshore claim.
- You pay interest, rent or fees to directors, shareholders or related companies.
- You’re in a group of companies sharing the two-tier rates.
- The IRD has already queried a previous return.
In these cases, a review before you file costs less than an enquiry after.
How Sleek helps you claim the right deductions
Sleek’s accountants prepare your books, audit-ready accounts and tax computation together, so deductions are sorted into the right categories long before your profits tax return is due.
With Sleek, you can:
- Keep deduction-ready books: monthly bookkeeping with deductible and non-deductible accounts kept separate.
- Claim every allowance: depreciation pools, 100% write-offs and enhanced deductions worked into your computation.
- File on time: audit and tax filing handled together, with your BIR51 filed before your profits tax filing deadline.
- Answer IRD questions with evidence: records organised so any query can be answered from your files.
You pay tax on what you actually earned, and nothing more.
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FAQs about deductible business expenses in Hong Kong
Can my company’s tax losses reduce my personal Salaries Tax?
No. A company is a separate taxpayer, so its losses can only be set against its own future profits. It’s different for a sole proprietor or partner: if you elect for personal assessment, your business loss can be set against your other income, including your salary, for that year. See taxes for freelancers and the self-employed.
How long can a Hong Kong company carry forward tax losses?
Indefinitely. Tax losses carry forward with no time limit and are set against the company’s future assessable profits until they’re used up. They can’t be carried back to earlier years or transferred to another company in the group.
I forgot to claim a deduction last year. Can I still claim it?
Usually, yes. If you haven’t received the assessment yet, write to the assessor with the details. If you have, apply for a revision within six years after the end of that year of assessment, or six months after the notice of assessment, whichever is later, with evidence of the missed expense.
Can a sole proprietor deduct their own MPF contributions?
Yes, up to the prescribed amount. A sole proprietor’s or partner’s own mandatory MPF contributions are deductible, currently capped at HK$18,000 a year. Voluntary contributions above that, and MPF paid for a spouse, aren’t.
Can my company deduct expenses I paid with my personal card?
Yes, if they’re business expenses of the company. Keep the receipt, record the expense in the company’s books and either reimburse yourself or credit your director’s current account. The company claims the deduction, not you.
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Can I deduct commissions paid to freelancers or agents?
Yes, if you can identify who you paid. The IRD’s pro forma computation adds back commissions paid without recipient details. Keep each recipient’s name, address and ID or business registration number, and report payments to non-employees on Form IR56M.
