1

Introduction

Accounting profits
- Non-taxable income (e.g. dividend)
+ Non-deductible expenses (e.g. depreciation, charitable
donation)
- Depreciation allowances
- Approved donation (35% limit)
= Assessable profits

2
 Capital and Revenue Expenditure

S 17(1)(c) disallows any expenditure of a capital

nature or any loss or withdrawal of capital
Need to distinguish between:
Capital expenditure (ND) v revenue expenditure (D)
S 17(1)(d) disallows the cost of any improvements

3
 Capital and Revenue Expenditure

Can adopt the fixed capital and circulating capital

(fixed and current assets) approach
Capital expenditure connected with fixed capital
of business
Revenue expenditure connected with circulating
capital of business

4
 Capital and Revenue Expenditure

"ONCE AND FOR ALL TEST"

Vallambrosa Rubber Co Ltd v. Farmer (1910)

Capital expenditure is a thing that is going to be spent

once and for all, and

Income (revenue) expenditure is a thing that is going

to recur every year

5
 Capital and Revenue Expenditure

"ENDURING BENEFIT TEST"

Atherton v. British Insulated & Helsby Cables Ltd
(1926):
When an expenditure is made, not only once and for all,
but with a view to bringing into existence an asset or an
advantage for the enduring of benefit of a trade, there is
a very good reason for treating such an expenditure as
properly attributable not to revenue but to capital

6
 Summary of Case Decisions -
Expenditure

(1) Acquisition of business

Cost of taking over a business is capital in nature

[John Smith and Son v Moore (1921)]

7
 Summary of Case Decisions -
Expenditure

(2) Replacement of asset

Expenses incurred in erecting a new structure "in its
entirety" or
The replacement of an entirety so that a new capital
asset is created
Are capital in nature
[O Grady v Bullcroft Main Collieries Ltd (1932)]

Cost of removing and replacing a part of an entire asset

Is revenue expenditure
[Samuel Jones & Co (Devonvale) Ltd v CIR (1951)]

8
 Summary of Case Decisions -
Expenditure

(3) Acquisition repairs

Cost of initial repairs to improve a newly acquired asset
to put it into a usable condition
Is capital in nature
[The Law Shipping Co Ltd v CM (1923)]

Cost of initial repairs to remedy normal wear and tear

of a newly acquired asset which is in working order
Is revenue in nature
[Odeon Associated Theatres Ltd v Jones (1971)]
9
 Summary of Case Decisions -
Expenditure
(4) Dismissal of employee
Payment to get rid of an unsatisfactory director is a
normal revenue expense which is part of cost of
engaging and dismissing servants regardless of its non-
recurrent nature
[Mitchell v BW Noble Ltd (1927)]

Payment to a retiring director for agreeing not to

compete with the company
Is capital expenditure
As it would increase the company's goodwill by buying
off potential competitors
[Associated Portland Cement Manufacturers Ltd v
Kerr (1946)]
10
 Deduction Rule under s 16(1)

All outgoings and expenses to the extent to which

they are incurred during the basis period for that
year of assessment in the production of profits
chargeable to Profits Tax

Specific deductible items in s 16(1)(a) to (h) and

s 16A to 16I

Specific non-deductible items in s 17(1) and (2)

11
 To the Extent
Disallow expenditure not related to or only partly related
to the production of chargeable profits
Apportionment permitted
DIPN 3, para. 6
The apportionment basis shall be reasonable and equitable
Taxpayer has to adduce primary documents in support that the
expenditure was truly incurred in the production of chargeable
profits
Ledgers are secondary and not primary documents
Inland Revenue Rule 2A
General apportionment of outgoings and expenses
An apportionment shall be made on such basis as is most
reasonable and appropriate in the circumstances of the case
Apportionment can be based on turnover, gross profit, income or
assets: para. 8 of DIPN 3
12
 To the Extent
Zeta Estates Ltd (2007)
A property development company, upon completion of
the property development project, had substantial
profits
It declared a dividend; but no actual payment was made
[the company was highly profitable but highly illiquid]
The dividend was left as loans from shareholders on
which interest was payable to the shareholders
The BoR (and agreed by CFI and CA) disallowed the
interest deduction as the loan was used to finance
payment of dividend
The CFA allowed the interest deduction on the ground
that the shareholders loan maintained the profit
earning capacity of the company
13
 Incurred

Not confined to a cash payment

Has a definite commitment or legal liability to pay
Contingent liability is not allowable
A contingent liability is allowable once the liability
crystallises: CIR v Cosmotron Manufacturing Co Ltd
(1997)
CIR v Lo & Lo (1984) [Privy Council decision]
Includes a sum where there is an obligation to pay (that is an
accrued liability which is un-discharged)
A specific provision for staff retirement benefits ascertained
with substantial accuracy is deductible
14
 In the Production of Profits
Follows the UK statute: for the purpose of trade
This was considered to be equivalent to in the
production of chargeable profits in HK: per Privy
Council in Cosmotron Manufacturing Co Ltd (1997) and
para. 2 of DIPN 3
Strong & Co of Romsey v Woodifield (1906)
For the purpose of trade was interpreted as for the
purpose of enabling a person to earn profits in the
trade
Not enough that the expense is made in the course of, or
arises out of, or is connected with the trade
In this case, compensation paid to a visitor to an inn who
suffered injury at the inn was not allowed for tax purpose
as not being money expended for the purpose of the trade
15
 In the Production of Profits
Chu Fung Chee (2006)
A barrister was required to bear the legal costs of the
disciplinary proceedings
These expenses were disallowed by the Court as they were
not expenses incurred in the production of chargeable
profits
These expenses were for preserving his practice as a
barrister, and hence capital expenditure which is not
deductible under s 17(1)(c)

16
 In the Production of Profits

Expenses incurred in the production of non-

taxable profits (e.g. capital receipts or offshore
profits) are not allowable

17
 In the Production of Profits

Payments disallowed
Fines and penalties
Excessive entertainment expenses
Medical expenses for sole proprietor
Fahy v CIR (1992) and para 4. of DIPN 3

18
 Fahy v CIR (1992)

The Court appeared to accept the medical

expenses had a dual purpose:
Partly for business and
Partly for private
In absence of a sensible basis of apportionment,
have to disallow whole expense

19
 CIR v Swire Pacific Ltd (1979)

Taxpayer was going to cease business and would

merge with another company in few months time

Payments made to end the strike of its whole

labour force were held as incurred in the
production of profits

20
 CIR v Swire Pacific Ltd (1979)

The only immediate purpose of the expenditure

was to get the workers back to work in order to
enable the company to continue its business
The payments did not bring into existence of any
assets
So long as the expense is made with the view to
produce profits it is tax deductible

21
 Banque Nationale de Paris Hong Kong
Branch v CIR (1985)
Interest charged by the bank's head office to the Hong
Kong branch was disallowed
The head office and branch were part of the same legal
entity
Accordingly no loan existed and no interest has been
incurred (notional expenses)
Note IRD practice:
Allows deduction of expenses charged by a foreign head office if
the expenses are on an arms length basis

22
 Conditions for Deduction of Interest
Expense on Money Borrowed

S 16(1)
S 16(1)(a)
S 16(2)
S 16(2A), (2B), (2C)
See DIPN 13A for Deductibility of Interest
Expense

23
 S 16(1)(a) - Interest Expenses
Interest payable on money borrowed for
producing chargeable profits
Relating expenses such as legal fees,
procuration fees and stamp duty
Allowable only if s 16(2) [subject to s 16(2A), (2B),
(2C) tests] can be satisfied

24
Conditions in s 16(2) for the Deduction
of Interest

S 16(2)(a)
Money borrowed by a financial institution
(including licensed bank and deposit taking
company)

S 16(2)(b)
money borrowed by a public utility company
not exceeding specified rate prescribed by the Financial
Secretary
(including HK Electric, China Light & Power, and HK
& China Gas)
25
Conditions in s 16(2) for the Deduction
of Interest

S 16(2)(c)
Money borrowed from a person
Other than financial institution and
Interest received by lender chargeable to tax in Hong
Kong
In other words, if interest income of the lender is
taxable, the borrowers interest expense is deductible

S 16(2)(d)
Money borrowed from a financial institution

26
Conditions in s 16(2) for the Deduction
of Interest

S 16(2)(e)
Money borrowed wholly and exclusively to finance
The provision of plant and machinery (qualifying for
depreciation allowance or deduction under s 16B, s
16G, s 16I) or the purchase of trading stock (in
production of chargeable profits) and
The lender is not an associate person

27
 Associate?

The borrower or any partner of the borrower

If the borrower is a corporation, includes any
shareholders (but not minority ones who have no
control), principal officer, director and associated
corporation
Natural person extended to that person's parents,
spouse, child, brother or sister (whole or half
blood, adopted or step)

28
Conditions in s 16(2) for the Deduction
of Interest

S 16(2)(f)
Money borrowed by a corporation
Through listed debentures and other marketable
instruments in HK or other major financial centres
approved by CIR
OR
Money borrowed from the borrowers associated
company which derived the money from proceeds on
the issue of listed debentures and other marketable
instruments
Limited to the interest paid by the associated company

29
 Conditions in s 16(2) for the Deduction
of Interest
S 16(2)(f)
Money borrowed from the borrowers associated
company which derived the money from proceeds on
the issue of listed debentures and other marketable
instruments
Limited to the interest paid by the associated company
Singapore Ltd. $1M @ 10%
Not subject Investors
to HK tax (Parent Co.). Issue bonds in Singapore
Stock Exchange
$1 M @10%
Indirect 1) @10%: $100,000 D
borrowing Interest payable 2) @8%: $80,000 D
from the
HK Ltd.
by HK Ltd.
market (100% sub.). 3) @12%: $100,000 D
30
 S 16(2A), (2B), (2C)

Deductions of interest expenses under s 16(2)(c),

s 16(2)(d), and s 16(2)(e) are further subject to 2
tests:
Secured loan test: s 16(2A)
Interest flow-back test: s 16(2B)
Deduction of interest expenses under s 16(2)(f) is
further subject to interest flow-back test: s
16(2C) [which is similar to s 16(2B)]

31
 S 16(2A)
Secured loan test: s 16(2A)
The loan is not secured or guaranteed by a deposit or loan
made by the borrower or an associate of the borrower with or
to
The lender
A FI or overseas FI, or
An associate of any of the above persons
where the interest generated by such deposit or loan is NOT
TAXAXBLE

32
 S 16(2B)

Interest flow-back test: s 16(2B)

There is no arrangement in place such that the interest payment
will be ultimately paid back to the borrower or a person
connected with the borrower

A person connected with the borrower: s 16(3A) &

(3B)
An associated corporation of the borrower, or
A person (other than a corporation)
Who controls the borrower
Who is controlled by the borrower, or
Who is under the control of the same person as the borrower

33
 S 16(2C)

Interest Flow Back Test: s 16(2C) similar to s 16(2B)

34
 S 16(2B), (2C) Not Applicable
Where interest expense is payable to certain classes of
persons (EXCEPTED PERSON), then interest flow-
back rules under s 16(2B) and s 16(2C) DO NOT apply:
Those who are chargeable to tax on the interest income
A bare trustee
A beneficiary of a unit trust specified under s 26A(1A)(a)
A member of a recognised retirement scheme
A public body
A government owned corporation, and
A FI (local or overseas)

35
Example 1 Borrowing secured by a loan: s 16(2A)
HONG KONG OVERSEAS

Overseas
HK Ltd Associate of
HK Ltd

Loan X Interest Loan Y Interest

(secured Payment Payment
by loan
Y)

Hong Kong Overseas Associate

Financial of Hong Kong
Institution Financial Institution

Note: Interest income received by the overseas

associate of HK Ltd is not taxable as the interest is
sourced outside Hong Kong
36
Example 1 Borrowing secured by a loan: s 16(2A)

Interest expense paid by HK Ltd is disallowed under

s 16(2A)
Repayment of loan was secured by a loan made by
an associate of the borrower to an associate of the
lender
Interest generated from the security loan is not
chargeable to tax in Hong Kong

37
Example 2 Borrowing to acquire trading stock: s 16(2A)
Loan
(secured by deposit) Overseas Associate
HK Ltd of Overseas
Financial Institution
Interest Payment

Deposit

Acquire Interest
trading stock Payment Overseas
Financial
Note: Interest income received by HK Ltd on the Institution
deposit is not taxable as the interest is sourced
outside Hong Kong

38
Example 2 Borrowing to acquire trading stock: s 16(2A)

Interest expense paid by HK Ltd is disallowed under

s 16(2A)
Repayment of the loan was secured by a deposit
made by the borrower with an associate of the
lender
Interest on the deposit is not chargeable to tax in
Hong Kong

39
Example 3 Assignment of loan: s 16(2B)
Overseas
HK Ltd Associate of
Cash Contribution HK Ltd

Interest
Loan Payment

Interest
Payment Overseas
Financial
Institution
Note: Interest income received by the overseas
associate of HK Ltd is not taxable as the interest is
sourced outside Hong Kong

40
Example 3 Assignment of loan: s 16(2B)

Interest expense paid by HK Ltd is disallowed under

s 16(2B)
Interest payment will flow back to a person
connected with the borrower, not being an
excepted person

41
Example 4 Borrowing by issue of debentures: s 16(2C)
Overseas
HK Ltd Associate of
HK Ltd
Proceeds
Fund to
from issue of acquire Interest
debentures debentures
Payment

Interest
Payment Overseas
Stock
Exchange
Note: Interest income received by the overseas
associate of HK Ltd is not taxable as the interest is
sourced outside Hong Kong

42
Example 4 Borrowing by issue of debentures: s 16(2C)

Interest expense paid by HK Ltd is disallowed under

s 16(2C)
Interest payment will flow back to a person
connected with the borrower, not being an
excepted person

43
 S 16(1)(b) - Rent

Rent payment in respect of land and buildings occupied for

producing chargeable profits

In case where rents are paid to tenants spouse or partner or partners

spouse, the deductible amounts are limited to assessable value of
property

44
 S 16(1)(c) - Foreign Income Tax Paid

If overseas income taxes are paid by corporation

or persons other than corporations who carries on
trade/profession/business in HK on interest
income or profits from disposal or redemption of
certificate of deposits or bills of exchange earned
outside HK but also taxable in HK under s 15(1)
(f), (g), (i), (j), (k) (l),
then these taxes are deductible

45
 S 16(1)(c) - Foreign Income Tax Paid

Deduction of other foreign taxes under s 16(1):

These foreign taxes should be based on earnings (rather
than profits) that is payable regardless of whether or not
a profit is made: DIPN 28, para 5. Typically such foreign
taxes will take the form of a withholding tax on income
derived (e.g., royalties)
A charge on profits is not deductible as it is not incurred
in the production of assessable profits under s 16(1):
DIPN 28, para. 4

46
 S 16(1)(c) - Foreign Tax Paid

C.D.
US
HK Ltd
Trading gain Financial Institution
$10,000
1. Suppose trading gains on CD are taxable in HK. Also, the US
government has imposed a 10% income tax ($1,000 = 10% x
10,000) on the trading gain. Then the 10% income tax of
$1,000 is deductible by HK Ltd under s 16(1)(c)
2. Suppose trading gains are NOT taxable in HK. But the US
government has imposed a 10% income tax ($1,000 = 10% x
10,000) on the trading gains . Then $1,000 is NOT deductible
under s 16(1)(c) or s 16(1)
47
 S 16(1)(c) - Foreign Tax Paid

Patent
HK Ltd Royalties
US Ltd
$10,000
1. Suppose royalties are taxable in HK. Also, the US government has
imposed a 10% withholding tax ($1,000 = 10% x 10,000) on the
royalties (not a charge on profits). Then the 10% tax of $1,000 is
deductible by HK Ltd under s 16(1)
2. Suppose royalties are NOT taxable in HK. But the US government
has imposed a 10% withholding tax ($1,000 = 10% x 10,000) on
the royalties. Then $1,000 is NOT deductible under s 16(1)
48
 S 16(1)(d) - Bad Debts
Bad and doubtful debts incurred in the ordinary
course of business (trade related)
Debts must have been included previously in the sales
and such sales have been assessed
Generally bad debts on loan to staff or suppliers are not
deductible because they are not trade debts
If sales are non-HK source, bad debt is ND.

49
 S 16(1)(d) - Bad Debts

Or in the case of a money-lending business, the

debt has been money-lent in the ordinary course of
business of money-lending
Proved to the satisfaction of assessor to have
become bad during the year (such as positive
actions have been taken to collect the debts)

50
 S 16(1)(d) - Bad Debts
Subsequent recovery is taxable if bad debts
previously allowed

Specific allowance for doubtful debts can be

deductible (D) but general allowance for doubtful
debts is not deductible (ND)

51
 S 16(1)(e) - Repairs
Expenditure incurred

In the repair of any premises, plant, machinery,

implement, utensil or article

Employed in the production of profits

Should not be improvements (as costs of improvements

are disallowed under s 17(1)(d))

52
 S 16(1)(e) - Repairs

Repair
An expense incurred to restore the asset to its original status
No new thing is added to an asset
100% deductible under s 16(1)(e)

Improvement
Something new is added to an asset
Capital nature and not deductible under s 17(1)(d)
Industrial / commercial building allowance can be granted

53
 S 16(1)(f) - Replacement

Expenditure incurred

In the replacement of any implement, utensil or

article

Employed in the production of profits

54
 S 16(1)(f) - Replacement
IRR 2 defines implement, utensil or article to include 8
items
Belting
Crockery and cutlery
Kitchen utensils
Linen
Loose tools
Soft furnishings (such as curtains and carpets)
Surgical and dental instruments
Tubes for X-ray and infra-red machines

Initial purchase not allowed and also not entitled to

depreciation allowances
55
 S 16(1)(g) - Registration

Registration expenditure

For trade mark, design or patent

Note that these are capital expenditure, but are
deductible under s 16(1)(g)

Used in the production of profits

56
 S 16(1)(ga) For Specific Deduction
Sections
Covers payments and expenditure under
S 16AA: contributions to MPF in self-employment cases
S 16B: expenditure on research and development
S 16C: payment for technical educations
S 16E: purchase and sale of patent rights
S 16EA: purchase and sale of specified intellectual property
rights
S 16F: expenditure on building refurbishment
S 16G: capital expenditure on the provision of prescribed
fixed asset
S 16I: capital expenditure on environmental protection facility

57
 S 16(1)(h) Others

Other deductions as may be prescribed by

any rule made under IRO

58
 S 16A - Special Payment under
Retirement Scheme

Initial and special contribution (other than

ordinary annual contribution) to RORS or MPF

Deductible in equal parts over 5 years of

assessment

No deduction for payment under non-RORS

59
S 16AA- Mandatory Contributions in
Self-Employed Cases
Where a person carries on a trade, business or
profession in HK as a sole-proprietor or as a
partner in a partnership

Pays mandatory contributions as a self-employed

person

60
 S 16AA- Mandatory Contributions in
Self-Employed Cases
These mandatory contributions are deemed to be wholly
and exclusively incurred in the production of the
assessable profits of the sole-proprietor or partnership
deductible
Maximum amount of deduction for mandatory
contributions = $12,000 (up to 2011/12); $14,500
(2012/13); $15,000 (2013/14) ; $17,500 (2014/15);
$18,000 (2015/16)
However, if a portion of assessable profit of sole
proprietor or partnership are not assessable (e.g. offshore),
then the deductible amount will have to be apportioned

61
S 16AA(2): A Deduction Under S 16AA(1)
Shall Not Be Allowable To A Person
In respect of any sum which is allowable as a deduction
under any other IRO sections of Profits Tax or s 26G
In excess of the amount specified in Schedule 3B
($12,000 up to 2011/12; $14,500 for 2012/13; $15,000
for 2013/14; $17,500 for 2014/15; $18,000 for 2015/16)
in relation to that year of assessment, as reduced by the
amount of any sum which is allowable to that person as
a deduction under any other IRO sections of Profits Tax
or s 26G

62
S 16AA(2): A Deduction Under S 16AA(1)
Shall Not Be Allowable To A Person
Example:
A person worked in a Company A as accounting
manager and paid MPF $1,250 per month
Besides, he carries on a business as sole-proprietor and
paid MPF $ 1,250 per month
As he has claimed deduction $15,000 (=$1,250 x 12)
for the Y/A 2013/14 under s 26G, he could not claim
any deduction under s 16AA(1) for the Y/A 2013/14

63
S 16AA(2): A Deduction Under S 16AA(1)
Shall Not Be Allowable To A Person
Income Mandatory Allowable deductions for HK
Contribution tax purposes (2013/14)
Salaries $120,000 $6,000 $6,000 (s 26G)
Profits $100,000 $5,000 $5,000 (s 16AA(1))
(Proprietorship)
Salaries $500,000 $15,000 $15,000 (s 26G)
Profits $400,000 $15,000 NIL (s 16AA(1))
(Proprietorship)
Salaries $120,000 $6,000 $6,000 (s 26G)
Profits $500,000 $15,000 $9,000 (s 16AA(1))
(Proprietorship)
Salaries $10,000 $500 $500 (s 26G)
Profits $300,000 $15,000 $14,500 (s 16AA(1))
(Proprietorship)

64
 S 16B - Expenditure on Research and
Development
Payment to approved research institute (any
university, college, institute, association or
organisation which is approved in writing by CIR:
see DIPN 5, Appendix) for research and
development related to the business
Expenditure on research and development related
to the business
Including capital expenditure
Excluding land or buildings (IBA granted for
buildings) Examples:
1. Improve technical efficiency of business
2. Medical research specially related to welfare of
workers employed in that trade or class of trade
65
 S 16B - Expenditure on Research and
Development
Where R & D expenditure is made/incurred in HK
and business is partly carried in HK and partly
outside HK, the entire R & D expenditure will qualify
for deduction (presumably to encourage local R & D)
Where R & D expenditure is made/incurred outside
HK and business is partly carried in HK and partly
outside HK, then need to apportion R & D
expenditure on some reasonable basis: s 16B(2) and
para. 7 of DIPN 3

66
S 16B - Expenditure on Research and
Development
research and development is defined:
- Any activities in the fields of natural or applied
science for the extension of knowledge;
- Any systematic, investigative or experimental
activities carried on for the purposes of any
feasibility study, or any market, business or
management research

67
 S 16B - Expenditure on Research and
Development
research and development is defined:
- Any original and planned investigations undertaken with the
prospect of gaining new scientific or technical knowledge and
understandings; or
- The application of any research findings or other knowledge
to a plan or design for the production or introduction of new
or substantially improved materials, devices, product,
processes, systems or services prior to the commencement of
their commercial production or use

68
S 16B - Expenditure on Research and
Development

Capital expenditure on plant and machinery

Which is required for research and development is

deductible

In full in the year of assessment in which it is

incurred.

69
S 16B - Expenditure on Research and
Development

Where a deduction has been allowed

The proceeds from subsequent sale are treated as
assessable trading receipts
At the time of sale
To the extent that the proceeds are not otherwise
chargeable to Profits Tax and
Do not exceed the amount of the original deduction

70
 S 16B - Expenditure on Research and
Development
If disposed R&D

Equipment cost $800,000 D under s 16B equipment in

R&D in 14/15 in 14/15 16/17
Building cost $1,200,000 ND under s 16B,
but can obtain IBA in 14/15
(industrial building allowance)
Disposed proceeds:
1. $800,000 T in 16/17
2. $600,000 T in 16/17
3. $900,000 (only
$800,000 T in 16/17)

71
 S 16C - Payments for Technical
Education
Made to approved education institution
Any university, university college, technical
college, or other similar institution which is
approved in writing by CIR: see DIPN 5, Appendix
For the purposes of technical education related to the
business
This is a question of fact
Education of a kind which is specially requisite for
persons employed in the class of business in which
the business operates

72
 S 16D - Approved Charitable
Donations

Rules same as under Salaries Tax (such as in

money, pure gift, to approved institution)

No deduction if having adjusted loss

No deduction for the second time if allowed

elsewhere in IRO

73
 S 16D - Approved Charitable
Donations

Restrictions
$100 in aggregate in the year of assessment

35% (for Y/A 2008/09 onwards) of profits after

deducting depreciation allowances but before loss set
off

74
 S 16D - Example

Net profit per account 150,000

Add: Depreciation 90,000
Donation 80,000
320,000
Less: Depreciation Allowance (120,000)
200,000
Less: Donation (35% x $200,000 = $70,000
actual donation of $80,000) (70,000)
Assessable Profit (or adjusted loss) 130,000
Less: Loss b/f (100,000)
Net Assessable Profit 30,000
Profits tax @ 16.5% (2014/15) 4,950

75
 S 16E - Purchase of Patent Rights (up
to 2010/11)
Expenditure incurred
In the purchase of patent rights ( ) or rights to
any know-how ( )
Patent right: right to do or authorise the doing of anything
which would, but for that right, be an infringement of a patent
Know-how: any industrial information or technique likely to
assist in the manufacturing or processing of goods or
materials
For use in Hong Kong business (partly HK and partly
non-HK, then apportionment: s 16E(2) and para. 7 of
DIPN 3)
In the production of profits
76
 S 16E - Purchase of Patent Rights (up
to 2010/11)
Proceeds from subsequent sale treated as trading receipt:
fully taxable (Not limited to amount of original deduction)

No deduction if purchased from an associate (widely

defined): s 16E(4)
If the purchaser is a natural person, an associate includes his/her
relative, partner, a corporation controlled by the purchaser
If the purchaser is a corporation, an associate includes an
association corporation and its director or principal officer

77
 S 16E - Purchase of Patent Rights (2011/12
onwards)
Key amendments:
- Legal expenses and valuation fees incurred in connection
with the purchase of patent are also deductible
- The requirement that a patent right or right to know-how
must be used in HK has been removed
- Tax deduction is now granted to the extent the right is used
in the production of chargeable profits

78
 S 16E - Purchase of Patent Rights (2011/12
onwards)
Key amendments:
- The taxable amount of the proceeds of sale of patent / know-
how rights is now limited to the deduction previously
allowed
- Patent rights now need to be registered under the new law
- Anti-avoidance provisions under section 16EC(4)(a)-(c),
which were not previously included in section 16E, are now
applicable to deduction claims under section 16E

79
S 16EA - Acquisition of Specified
Intellectual Property Rights (2011/12
onwards)
Specified intellectual property (IP) rights:
copyrights ( ), registered designs (
) or registered trademarks ( )
- Note: no registration regime for copyrights in HK and most
jurisdictions

80
S 16EA - Acquisition of Specified
Intellectual Property Rights (2011/12
onwards)
Capital expenditure incurred by a person on the
purchase of a specified IP right, including legal
expenses and valuation fees, can be deducted if ALL of
the following conditions are met:
The person must have acquired the proprietary interest (i.e.
legal and economic ownership) of the specified IP right;
The specified IP right is purchased for use in the production
of that persons profits chargeable to HK profits tax;

81
S 16EA - Acquisition of Specified
Intellectual Property Rights (2011/12
onwards)
The subject trademark or design must have been registered
under the relevant law of HK or any place outside HK;
The specified IP right must have been used in the
production of that persons chargeable profits during a part
or the whole of the basis period for a year of assessment in
which a deduction is claimed; and
The purchaser must hold the specified IP right at the end
the basis period for a year of assessment in which a
deduction is claimed

82
S 16EA - Acquisition of Specified
Intellectual Property Rights (2011/12
onwards)

The purchase cost is to be deducted over 5 Y/A on a

straight-line basis starting from the Y/A in which the
capital expenditure is incurred

83
S 16EA - Acquisition of Specified
Intellectual Property Rights (2011/12
onwards)
If the specified IP right is a copyright or registered design
and
The maximum period of protection is due to expire within
the 5-year deduction period,
Then the purchase cost can be deducted in equal amounts
over the number of remaining years of protection

84
S 16EA - Acquisition of Specified
Intellectual Property Rights (2011/12
onwards)
The CIR is empowered to
determine the true market value of a specified IP right for
tax deduction purpose
allocate the consideration for an individual specified IP
right when such right is purchased together with another
specified IP right or with any other assets for one
consideration

85
S 16EB - Disposal of Specified Intellectual
Property Rights (2011/12 onwards)
Sale of specified IP rights
For any specified IP rights in respect of which a tax
deduction has been previously allowed, the sale proceeds
of such specified IP rights will be deemed as taxable
trading receipts at the time of the sale
The taxable amount will be limited to the deduction
previously allowed under section 16EA

86
 S 16EB - Disposal of Specified Intellectual
Property Rights (2011/12 onwards)
If the specified IP right is sold within the 5-year deduction
period such that part of the purchase cost has not been
claimed as deduction at the time of sale (i.e. the unallowed
amount):
If unallowed amount > sale proceeds, then a final deduction
amount of (unallowed amount - sale proceeds) in the year of sale
If unallowed amount < sale proceeds, then a taxable amount of
(sale proceeds - unallowed amount) in the year of sale; but the
taxable amount is limited to s 16EA deduction previously granted

87
S 16EC Anti-avoidance for Deduction of
Patent and Specified Intellectual Property
Rights (2011/12 onwards)
Situations where a deduction will be denied include:
1. Where a specified IP right is purchased wholly or partly from
an associate (s 16EC(2));
2. Under certain avoidance arrangements involving transfer of a
specified IP right in circular route for obtaining tax benefit
(i.e. the sale and license back arrangements) (s 16EC(4)
(a));

88
S 16EC Anti-avoidance for Deduction of
Patent and Specified Intellectual Property
Rights

(2011/12 onwards)
Situations where a deduction will be denied include:
3. For any specified IP right that is licensed for use wholly or
principally outside HK by a person other than the purchaser
(s 16EC(4)(b)); and
4. For any specified IP right of which the whole or a
predominant part of the consideration was financed directly
or indirectly by a non-recourse debt (i.e. the leveraged
leasing arrangement) (s 16EC(4)(c))
Situations 2-4 are similar to those under section
39E(1)(a) and (b) that deal with plant or machinery
89
Deduction of Cost of Intellectual Property
(2011/12 onwards)
Deduction of cost of intellectual property (from 2011/12)

Not purchased from an associate

S 16E S 16EA

Specified intellectual property

Patent rights, Copyright Registered Registered

Know-how rights Design trade mark

Deductible Deductible in 5 equal instalments

Source: Patrick Ho, HK Tax Update 2011, ACCA HK Branch, 16 Feb
90
Sale of Intellectual Property (2011/12
onwards)
Sale of intellectual property (from 2011/12)

S 16E S 16EB

Specified intellectual property

Copyright Registered Registered

Patent rights,
Design trade mark
Know-how rights
Sales > Unallowed Sales < Unallowed
Sale proceeds
taxable Excess taxable Deficit deductible

Taxable up to amount deducted previously

Source: Patrick Ho, HK Tax Update 2011, ACCA HK Branch, 16 Feb
91
 S 16F - Expenditure on Building
Refurbishment

Generally, it is not for residential buildings

Deduction is available for capital expenditure
Incurred in the production of chargeable profits
On the renovation or refurbishment of any building
or structure
Not used for domestic purposes
Such a building or structure should not be used for
habitation
Except in the case of a hotel or guesthouse

92
 S 16F - Expenditure on Building
Refurbishment

Deduction is not available for initial construction

and fitting out expenses
Deduction is allowed for 20% of the qualifying
capital expenditure in the basis period in which it
was incurred
Remainder of the expenditure is deductible by
four equal deductions over the next succeeding
four years

93
 S 16F - Expenditure on Building
Refurbishment

If the relevant building refurbishment is sold

before s 16F deductions are fully granted, the
taxpayer is still granted the s 16F deductions as if
the building refurbishment has not been sold
There is no balancing charge or allowance concept
(as those in depreciation allowance of plant and
machinery) under s 16F
The sales proceed of the building refurbishment is
not assessable under profits tax

94
 S 16F - Expenditure on Building
Refurbishment

Refurbishment deduction is not permitted for

capital expenditure incurred: s 16F(4)
For renovation of staff quarters
For decoration of a newly acquired office before use
Expenditure incurred to convert an office into a
showroom

95
S 16G - 100% Write off for Prescribed
Fixed Assets
A taxpayer chargeable to Profits Tax is entitled to a
deduction for capital expenditure incurred on
prescribed fixed assets
This deduction is available notwithstanding the
prohibition on the deduction of capital expenses
prescribed under s 17(1)(c)
Apportionment of expenditure on prescribed fixed
assets where the asset is partly used in production of
chargeable profits: s 16G(2) and para. 7 of DIPN 3

96
 S 16G - 100% Write off for Prescribed
Fixed Assets
Prescribed fixed assets
Specified items of machinery or plant which are used
specifically and directly for any manufacturing process
Computer hardware, excluding hardware which is an integral
part of any machinery or plant and
Computer software and computer systems
Not include an excluded fixed asset
A fixed asset in which any person hold rights as a lessee
under a lease (i.e. leased assets)
Capital expenditure on moulds do not qualify for s 16G
deduction if the moulds were not used by the owner but used
by the lessees. These moulds were under a lease and became
excluded fixed assets: Braitrim (Far East) Ltd v CIR
(2012)
97
S 16G - 100% Write off for Prescribed
Fixed Assets

Sale of prescribed fixed asset

Proceeds from sale are treated as trading receipts

If the taxpayer has previously obtained a deduction
Proceeds are chargeable
Not exceed the amount of the original deduction

98
 S 16H to 16K Capital Expenditure
on Environmental Protection Facilities

To provide accelerated deduction for capital

expenditure incurred on environmental protection
facilities ( )
Provision of any environmental protection machinery (
) [this part is effective from 27 June 2008]
Construction of any environmental protection installation
( ) [this part is effective from 27 June 2008], or
Provision of any environment-friendly vehicle (
) [this part is effective from 18 June 2010]

99
 S 16H to 16K Capital Expenditure
on Environmental Protection Facilities

Tax treatments of environmental protection machinery and

environment-friendly vehicle are almost identical to those
under s 16G (prescribed fixed assets)
Tax treatments of environmental protection installation are
similar to those under s 16F (building refurbishment), except
for
Residential building: s 16F does not apply to residential
building in general, but environmental protection
installation applies to residential building
Balancing adjustment: s 16F does not have any balancing
adjustment, but environmental protection installation has
balancing adjustment
100
 S 16H Environmental Protection
Machinery
Environmental protection machinery ( ) is defined in s 16H(1)
As the types of machinery or plant per Part 1 of the Sch 17
Low noise construction machinery or plant (
) registered under Quality Powered Mechanical Equipment
system administered by the Environmental Protection Department
Air pollution control machinery or plant (
) in compliance with the requirements under the Air Pollution
Control Ordinance
Waste treatment machinery or plant ( ) in
compliance with the requirements under the Water Disposal Ordinance
Waste water treatment machinery or plant (
) in compliance with the requirements under the Water Pollution
Control Ordinance
Does not include
Any machinery or plant in which any person holds rights as a lessee
under a lease
101
 S 16H Capital Expenditure on
Environmental Protection Machinery
Specified capital expenditure ( ) on environmental
protection machinery ( ) is defined in s 16H(1) and (2)
Any capital expenditure incurred for the provision of any
environmental protection machinery
Include capital expenditure incurred on alternations to an
existing building incidental to the installation of that
environmental protection machinery or plant
Does not include
Any capital expenditure incurred under a hire-purchase
agreement,
Any capital expenditure that may be deducted under other
IRO sections of profits tax, OR
Any machinery or plant in which any person holds rights
as a lessee under a lease
102
 S 16H Environmental Protection
Installation
Environmental protection installation ( ) is defined in s 16H(1)
As the types of installation per Part 2 of the Sch 17
solar water heating installations ( )
solar photovoltaic installations ( )
wind turbine installations ( )
offshore wind farm installations ( )
landfill gas installations ( )
anaerobic digestion installations ( )
thermal waste treatment installations ( )
wave power installations ( )
hydroelectric installations ( )
bio-fuel installations ( )
biomass combined-heat-and-power installations ( )
geothermal installations ( )
Energy efficient building installations ( ) registered
under the Hong Kong Energy Efficiency Registration Scheme for Buildings
administered by the Electrical and Mechanical Services Department

103
 S 16H Capital Expenditure on
Environmental Protection Installation
Specified capital expenditure ( ) on
environmental protection installation ( ) is defined in s
16H(1) and (2)
Any capital expenditure incurred for the construction of any
environmental protection installation
Does not include
Any capital expenditure incurred under a hire-purchase
agreement,
Any capital expenditure that may be deducted under other
IRO sections of profits tax, OR
Any expenditure incurred on the acquisition of, or rights
in or over, any land

104
 S 16H Environment-Friendly Vehicle
Environment-friendly vehicle ( ) is defined in s 16H(1)
As any vehicle that is specified in Part 3 of the Sch 17
Any vehicle qualified for remission of first registration tax under the
following schemes administered by the Environmental Protection Department
The Tax Incentives Scheme for Environment-friendly Commercial
Vehicles
The Tax Incentives Scheme for Environment-friendly Petrol Private Cars
Any motor vehicle that is capable of drawing energy from both of the
following on-vehicle sources of stored energy or power for mechanical
propulsion
Consumable fuel
Battery, capacitor, flywheel, generator or other electrical energy or power
storage device
Any motor vehicle that is solely propelled by electric power and does not emit
any exhaust gas
Does not include
Any vehicle in which any person holds rights as a lessee under a lease

105
 S 16H Capital Expenditure on
Environment-Friendly Vehicle
Specified capital expenditure ( ) on environment-
friendly vehicle ( ) is defined in s 16H(1)
Any capital expenditure incurred for the provision of any
environment-friendly vehicle
Does not include
Any capital expenditure incurred under a hire-purchase
agreement,
Any capital expenditure that may be deducted under other
IRO sections of profits tax, OR
Any machinery or plant in which any person holds rights
as a lessee under a lease

106
S 16I Deductions for Capital Expenditure
on Environmental Protection Facility

Capital expenditure incurred on the provision of

environmental protection machinery OR
environment-friendly vehicle
100% deductible in that year of assessment: s 16I(2)

107
S 16I Deductions for Capital Expenditure
on Environmental Protection Facility

Capital expenditure incurred on the construction

of environmental protection installation
deductible equally in 5 years of assessment: s 16I(2)
20% deduction in Y/A when the expenditure is
incurred; 80% deductible equally in next succeeding 4
Y/A so long as the installation has not been sold at the
end of the basis period for the Y/A concerned: s 16I(3)
No deduction in the year of sale, but a balancing adjustment is
made for the year of sale or destruction

108
S 16I - Environmental Protection Facility
Partly Used for Producing Chargeable
Profits
Only a part of capital expenditure incurred on the
environmental facility is deductible
The deductible amount is proportionate to the extent of
the use of the facility in the production of assessable
profits: s 16I(4)

109
S 16J - Sale of Environmental Protection
Machinery OR Environment-friendly
vehicle
Environmental protection machinery or
environment-friendly vehicle
Sales proceeds are treated as trading receipts which are
chargeable to profits tax
The taxable amount is limited to the amount of
deduction granted for the past years of assessment: s
16J(1), (2) and (2A)

110
S 16J - Sale of Environmental Protection
Installation

Environmental protection installation

If sales proceeds < unallowed expenditure, then the
excess is deductible in the year of sale: s 16J(3)(a)
If sales proceeds > unallowed expenditure, then the
excess is treated as a trading receipt and taxable in the
year of sale
The taxable amount is limited to the amount of
deduction granted for the past years of assessment:
s 16J(3)(b)

111
S 16J Controlled Sale of Environmental
Protection Facility

If CIR views that the sale price does not represent

its true market value, the CIR may substitute the
sale price with the true market value for a
controlled sale: s 16J(4)
Buyer is a person over whom the seller has control
Seller is a person over whom the buyer has control
Both seller and buyer are persons over whom some
other person has control
The sale is between husband and wife who are not
living apart

112
S 16J Destruction of Environmental
Protection Facility

If the environmental protection facility is

destructed, such facility is treated as sold before
destruction
Any insurance money or other compensation
received is treated as sale proceeds: s 16J(5) and
16J(5A)

113
 S 16K Transitional Treatment for
Environmental Protection Facilities
Owned
Environmental protection machinery
The unallowed expenditure on environmental
protection machinery in use before Y/A 2008/09 is
treated as incurred in Y/A 2008/09
The unallowed expenditure is 100% deductible in Y/A
2008/09: s 16K(1) and (3)
Environment-friendly vehicle
The unallowed expenditure on environment-friendly
vehicle in use before Y/A 2010/11 is treated as
incurred in Y/A 2010/11
The unallowed expenditure is 100% deductible in Y/A
2010/11: s 16K(1) and (3)

114
 S 16K Transitional Treatment for
Environmental Protection Facilities
Owned
Environmental protection installation
The unallowed expenditure on environmental
protection installation in use before Y/A 2008/09 is
treated as incurred in Y/A 2008/09
The unallowed expenditure is deductible in 5 equal
instalments in 5 Y/A commencing from Y/A 2008/09: s
16K(1) and (4)

115
Example 1: Purchase of Environmental
Protection Machinery in/after 2008/09

P Ltd incurred $200,000 in November 2014 on

acquisition of environmental protection
machinery for the year ended 31 December 2014
Deduction available under s 16I in 2014/15 is
$200,000

116
Example 2: Sale of Environmental Protection
Machinery Purchased in/after 2008/09
Same data as Example 1
P Ltd sold the environmental protection machinery
for $210,000 in 2016/17
Deduction available under s 16I in 2014/15 is
$200,000
Amount assessable under s 16J in 2016/17 is
$200,000 (not $210,000)
If sold for $170,000 in 2016/17, then amount
assessable under s 16J in 2016/17 is $170,000

117
Example 3: Purchase of Environmental
Protection Machinery before 2008/09

Q Ltd incurred $200,000 in November 2007 on

acquisition of environmental protection machinery
for the year ended 31 December 2007
Deduction available under s 16I for 2008/09 is as
follows:
Cost (2007/08) $200,000
Less: Initial Allowance (60%) (120,000)
80,000
Less: Annual Allowance (20%) (16,000)
Written down value c/f to 2008/09 64,000

Deduction available under s 16I for 2008/09 $64,000

118
Example 4: Sale of Environmental Protection
Machinery Purchased before 2008/09
Same data as Example 3
Q Ltd sold environmental protection machinery for
$70,000 in 2011/12
Deduction claimed under s 16I for 2008/09 is
$64,000
Amount assessable under s 16J in 2011/12 is $64,000
(not $70,000)
If sold for $52,000 in 2011/12, then amount
assessable under s 16J in 2011/12 is $52,000

119
Example 5: Purchase of Environment-
Friendly Vehicle in/after 2010/11

P Ltd incurred $200,000 in November 2014 on

acquisition of environment-friendly vehicle for
the year ended 31 December 2014
Deduction available under s 16I in 2014/15 is
$200,000

120
Example 6: Sale of Environment-Friendly
Vehicle Purchased in/after 2008/09
Same data as Example 5
P Ltd sold the environment-friendly vehicle for
$210,000 in 2016/17
Deduction available under s 16I in 2014/15 is
$200,000
Amount assessable under s 16J in 2016/17 is
$200,000 (not $210,000)
If sold for $170,000 in 2016/17, then amount
assessable under s 16J in 2016/17 is $170,000

121
Example 7: Purchase of Environment-
Friendly Vehicle before 2010/11

Q Ltd incurred $200,000 in November 2009 on

acquisition of environment-friendly vehicle for the
year ended 31 December 2009
Deduction available under s 16I for 2009/10 is as
follows:
Cost (2009/10) $200,000
Less: Initial Allowance (60%) (120,000)
80,000
Less: Annual Allowance (30%) (24,000)
Written down value c/f to 2010/11 56,000

Deduction available under s 16I for 2010/11 $56,000

122
Example 8: Sale of Environment-Friendly
Vehicle Purchased before 2010/11
Same data as Example 7
Q Ltd sold environment-friendly vehicle for $70,000
in 2013/14
Deduction claimed under s 16I for 2010/11 is
$56,000
Amount assessable under s 16J in 2013/14 is $56,000
(not $70,000)
If sold for $52,000 in 2013/14, then amount
assessable under s 16J in 2013/14 is $52,000

123
 Example 9: Environmental Protection
Installation Constructed in/after 2008/09
R Ltd incurred $6,000,000 in November 2014 on
construction of environmental protection structure
for the year ended 31 December 2014
Deductions available under s 16I is as follows:
$1,200,000 (2014/15)
$1,200,000 (2015/16)
$1,200,000 (2016/17)
$1,200,000 (2017/18)
$1,200,000 (2018/19)

124
 Example 10: Sale of Environmental
Protection Installation Constructed in/after
2008/09
Same data as Example 9
Q Ltd sold the environmental protection structure
for $4,800,000 in 2016/17
Deductions claimed under s 16I are as follows:
$1,200,000 (2014/15) $2,400,000
$1,200,000 (2015/16)
Unallowed expenditure c/f to 2016/17 is
$6,000,000 2,400,000 = $3,600,000
Amount assessable under s 16J in 2016/17 is
$1,200,000 ($4,800,000 - 3,600,000)
125
 Example 10: Sale of Environmental
Protection Installation Constructed in/after
2008/09
If sold for $9,000,000 in 2016/17, then amount
assessable under s 16J in 2016/17 is $2,400,000
($9,000,000 3,600,000 = $5,400,000, but limited
to s 16I deductions claimed of $2,400,000)
If sold for $1,300,000 in 2016/17, then amount
deductible under s 16J in 2016/17 is $2,300,000
($3,600,000 1,300,000)

126
 Example 11: Environmental Protection
Installation Constructed before 2008/09
S Ltd incurred $1,500,000 in November 2006 on construction of environmental
protection structure for the year ended 31 December 2006
Deduction available for 2008/09 is as follows:
Cost (2006/07) $1,500,000
Less: Annual Allowance of CBA for 2006/07(4%) (60,000)
1,440,000
Less: Annual Allowance of CBA for 2007/08 (4%) (60,000)
Written down value c/f to 2008/09 1,380,000

Deduction available under s 16I for 2008/09 (20%) is:

$276,000 ($1,380,000 x 20%)

127
 Example 12: Sale of Environmental
Protection Installation Constructed before
2008/09
Data as Example 11
S Ltd sold the environmental protection structure
for $1,400,000 in 2009/10
Deduction claimed under s 16I in 2008/09 is:
$276,000
Unallowed expenditure c/f to 2009/10 is
$1,380,000 276,000 = $1,104,000
Amount assessable under s 16J in 2009/10 is
$276,000 ($1,400,000 - $1,104,000 = $296,000
but limited to s 16I deductions claimed of
$276,000)
128
 Example 12: Sale of Environmental
Protection Installation Constructed before
2008/09
If sold for $1,300,000 in 2009/10, then amount
assessable under s 16J in 2009/10 is $196,000
($1,300,000 1,104,000)
If sold for 800,000 in 2009/10, then amount
deductible under s 16J in 2009/10 is $304,000
($1,104,000 $800,000)

129
 Tax Treatment for Environmental Protection Machinery
Environmental protection machinery

Low noise Air pollution Waste Wastewater

control treatment treatment

Capital expenditure

Cost of machinery Cost of alternation to

existing building

Cash purchase Hire purchase

Self-use Under a lease

Machinery used Machinery used

outside HK in HK

Cost 100% deductible No depreciation Depreciation

in year of acquisition allowance: s 39E(1)(b) allowance

Source: Patrick Ho (2013), Hong Kong Taxation and Tax Planning, p. 288

130
 Tax Treatment for Environment-Friendly Vehicle
Environment-friendly vehicle

Qualify for remission of Motor vehicle capable of drawing energy Motor vehicle that is SOLELY
1st registration tax from BOTH consumable fuel and battery etc propelled by electric power

Capital expenditure

Cost of vehicle

Cash purchase Hire purchase

Self-use Under a lease

Vehicle used Vehicle used in

outside HK HK

Cost 100% deductible No depreciation Depreciation

in year of acquisition allowance: s 39E(1)(b) allowance

131
 Tax Treatment for Environmental Protection Installation
Environmental protection installation

Solar water heating Solar photovoltaic Energy efficient building

installations installations installations

Capital expenditure

Cost of construction Cost of land

Cash purchase Hire purchase

Cost deductible equally in 5

years of assessment No deduction and
depreciation allowance

132
 S 17(1) - Non-allowable Deductions

Domestic or private expenses including

Travelling cost between places of residence and business
Contributions made to MPF in the persons capacity as a
scheme member [s 17(1)(a)]
NO practical application as s 17(1)(a) on MPF has been
overridden by s 16AA

Not for the purpose of producing chargeable profits

[s 17(1)(b)]

133
 S 17(1) - Non-allowable Deductions

Capital expenditure, loss or withdrawal of capital [s

17(1)(c)], examples are:
Sole traders salaries
Interest on capital or loan provided by sole trader

Cost of improvements [s 17(1)(d)]

e.g. cost of enhancing the functions and efficiency of a
manufacturing plant
Industrial / commercial building allowance can be granted

134
 S 17(1) - Non-allowable Deductions

Sum recoverable under an insurance or contract of

indemnity [s 17(1)(e)]

Rent and relating expenses of premises not used

for producing chargeable profits [s 17(1)(f)]

Any tax payable under IRO, except Salaries Tax

paid as employees' remuneration [s 17(1)(g)]

135
 S 17(1) - Non-allowable Deductions

Ordinary annual contribution to RORS or regular

contribution to MPF
If exceeding 15% of each employee's total
emoluments in the year [s 17(1)(h)]

Provision for above contribution

If exceeding 15% limit [s 17(1)(i)]

136
 S 17(1) - Non-allowable Deductions

Provision for special payment to RORS or MPF

All contributions, payments and provisions to non-

RORS

S 17(1)(j) + (l)

137
 S 17(2) - Salaries and Interest

No deduction for
Salaries or other remuneration of, or
Interest on capital or loans provided by
Proprietors spouse, partner or partners spouse

No deduction for mandatory contribution to MPF

scheme for proprietors spouse and partners
spouse

138
 Other Issues

Payments to Retirement Schemes

Exchange gains and losses
Legal and professional expenses
Interest on borrowed money used in purchase of
shares (IRR 2B)
Investment portfolio (IRR 2C)

139
 Payments to Retirement Schemes
RORS or MPF
Initial or special contribution for RORS or MPF:
allowable by 5 equal yearly instalments [s 16A]
Provision for initial or special contribution for
RORS: not allowable
Ordinary annual contribution to RORS or regular
contributions to MPF: allowable but limited to
15% of each employee's total emoluments in the
year [s 17(1)(h)]

140
Payments to Retirement Schemes

Provision for ordinary annual contribution to

RORS or provision for regular contribution to
MPF: allowable but subject to 15% limit of the
aggregate of payment and provision [s 17(1)(i)]
If provisions previously made and allowed, no
second deduction upon payment [s 17(1)(k)]
Refund of contributions of RORS or refund of
voluntary contributions to MPF previously
allowed is taxable [s l5(1)(h)]

141
 Payments to Retirement Schemes

Non-RORS
All kinds of contribution
and provision are not
allowable [s 17(1)(j) & (l)]

142
 Exchange Gains and Losses

Accounts prepared in foreign currencies must be

converted to HK$ for the purpose of ascertaining the
Assessable Profits

Tax treatment: examine whether the underlying assets

or liabilities attached to the transactions are capital or
revenue in nature
Capital nature Exchange gain (NT) and exchange loss
(ND)
Revenue nature Exchange gain (T) and exchange loss
(D) if deriving onshore and chargeable profits

143
 Exchange Gains and Losses

DIPN 42
Effective 2005/06, all foreign exchange gains or losses
recognised in the profit and loss accounts are treated as
taxable receipt or deductible expenses, if they are onshore
and revenue in nature
The above tax treatment applies regardless of whether the
foreign exchange transactions are settled/realised or not
(i.e., same tax treatment for realised and unrealised
exchange differences)

144
 Exchange Gains and Losses
CIR v Li & Fung Ltd (1980)
Exchange loss case capital in nature not deductible
Facts:
Taxpayer placed its trading receipts in US dollars in a 7-
days call deposits
Exchange loss was held as capital in nature
The nature was converted to capital investments when
placed on deposit with the intention of obtaining a more
favourable exchange rate

145
 Exchange Gains and Losses

CIR v Jebsen & Co. (HKTC 1)

Exchange gain case capital in nature not taxable

146
 Exchange Gains and Losses

CIR v Chinachem Finance Co. Ltd (1992)

Exchange loss case revenue in nature deductible

CIR v Hang Seng Bank (1972)

Exchange loss case revenue in nature deductible

147
 Exchange Gains and Losses
Nice Cheer Investment Ltd v CIR (2013)
Unrealised exchange gain case revenue in nature not
taxable
Unrealised gains arising from the revaluation of trading
investments, being securities listed in HK, to their
respective market values at the balance sheet date and
credited in its profits and loss account according to ordinary
commercial accounting principles
CFI, CA and CFA the unrealised profits based on the
market value of the trading securities at the balance sheet
date is not chargeable to profits tax

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 Legal and Professional Expenses

Deductibility depends on the nature of underlying

events attached to the payment
Allowable if
Related to recovery of trade debts
Renewal (not first signing) of lease
Defending trade disputes
Obtaining business loan finance (if satisfied
s 16(1)(a) and any s 16(2) conditions)

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 Legal and Professional Expenses

Initial Tenancy Agreement (i.e. First Lease)

Tenant: legal fee + stamp duty ND (since tenant obtains
a right to occupy a property for a period and this right is a
capital asset)

Landlord: legal fee + stamp duty D (usually allowed by

IRD)

150
 Legal and Professional Expenses
Legal fees incurred in appeal against tax assessment
are not allowable
Accountancy fees for the submission of tax returns and tax
advisory services are allowable
Not allowable if related to acquiring property or fixed assets
Not qualify for Industrial / Commercial Building Allowance
Not qualify for Depreciation Allowance for Plant & Machinery
But if interest is deductible (say, under s 16(1)(a) and s 16(2)(e)), then
related legal fees could also be deductible

151
 General Apportionment of Outgoings
and Expenses (IRR 2A)

General apportionment of outgoings and expenses

An apportionment shall be made on such basis as is

most reasonable and appropriate in the circumstances
of the case

Apportionment can be based on turnover, gross profit,

income or assets: para. 8 of DIPN 3

152
 Interest on Borrowed Money Used in
Purchase of Shares (IRR 2B)

Apportionment for interest paid on money borrowed partly

used for the purchase of shares (producing non-taxable
income, e.g. dividend) and partly for other purposes
On such basis most reasonable and appropriate in the
circumstances
Apportionment can be based on turnover, gross profit,
income or assets: para. 8 of DIPN 3
Not applicable to share dealing business

153
 Investment Portfolios (IRR 2C)

A due proportion of the management, clerical and

general expenses attributable to the supervision
and management of investment portfolio should be
disallowed
Maximum 1/8% (0.125%) of the cost of investment
where the investments are held at least partly for share
dealing business: para. 9(d) of DIPN 3
Maximum 1/2% (0.5%) of the cost of investment in any
other cases

154
 Investment Portfolios (IRR 2C)
Example
An import and export company has a large
investment portfolio costing $1.5M at year end
During the year, the related general supervision &
management expenses amount to $50,000 which
has been claimed in the tax computation

155
 Investment Portfolios (IRR 2C)

The amount will be adjusted (in maximum):

Add back $1.5M x 1/2% = $7,500 (maximum)
No adjustment needed if the assessor considers
investment not sufficiently large

156
 DIPN 3 + IRR 2A-C

DIPN 3 provides 4 practical apportionment

methods which are largely based on IRR 2A, 2B
and 2C: see para. 9 of DIPN 3

157
 Relevant DIPNs

DIPN 3: Apportionment of expenses

DIPN 5: Deductions for research and development (s 16B),

technical education (s 16C), patent rights, etc (s 16E),
building refurbishment (s 16F), prescribed fixed assets (s
16G), environmental protection facilities (ss 16 H K)

DIPN 13A: Deductions of interest expenses

DIPN 28: Deductions of overseas taxes

158
 Relevant IRRs
IRR 2: Implements, utensils and articles (also covers
annual allowance rates for plant and machinery
depreciation allowances)
IRR 2A: General rule on apportionment of outgoings
and expenses
IRR 2B: Interest on money borrowed used in purchase
of shares
IRR 2C: Apportionment of overhead for investment
portfolio

159