In this blog we will explore how Hong Kong tax policies are implemented on the occurrence of some fortunate and unfortunate events in the daily affairs of taxpayer’s life. These expenses include losses due to theft and misappropriation, expenses of entertainment, commission, removal expenditures, legal expenditures, penalties and fines, tax fees and professional accounting, trade associations’ subscription, tax paid, private use of cars and some other expenditures, sums to the relatives, exchange loss, expenditures of a jockey, clothing and stockbroker. We will be discussing all these different expenses in relation to the laws defined in Hong Kong taxation system.

Inclusion and Deduction of different Expenses for Profit Tax

Losses Due to the Misappropriation and Theft

Losses due to the misappropriation or theft by an employee or servant may be permissible as being an expenditure identical to, arising out of, and the carrying of the commerce. The reference for this statement is taken from the case of J & G Oldfield Ltd. butif the misappropriation or theft was done by a director or partner of a private company, then the loss is not permissible.

Expenditures of Entertainment  

Under the Section 16 (1) of Inland Revenue Ordinance, the general rule is to determine that whether deduction can be granted or not for taxpayer having establish company in Hong Kong. The nature of entertainment cannot be of capital expense, domestic or private. If the nature of the entertainment is social or private predominantly and the business is incidental merely, then the entertainment is not permissible. In the generation of profits that are not taxable (for example, offshore profits) the entertainment cannot be used.

If the entertainment is in connection mainly with the business transactions and the persons amused are potential clients or existing, then only a deduction can be granted. A claim must be a proof by evidence in the form of document and description with detail of each item, such as persons amused, costs and the nature of business.

In the case of So Kai Tong, it was observed that, entertainment expenditures were claimed by a practicing accountant. The taxpayer was only capable to generate the statements of credit card in order to prove the part of the amount spent. The details of the particulars for the reasons of dinner / lunch (except for the small amount of expenditures) and person entertained, etc. were not given by the taxpayer. The 80% of the amount proved by the statement of credit card was premised by the board of review as a broad percentage.


According to the departmental interpretation and practice notes 12, the commission granted to an undisclosed person is not allowable as deduction.

Removal Expenses

The cost of any enhancements is not permissible for taxpayers setting up sole proprietorship in Hong Kong (for example, moving to the larger places). But, the cost of machinery’s or plant’s removal can be chartered for the devaluation allowance and the cost of trading stock’s removal can be allowable as deduction.

Where the dismissal is not voluntary (for example, forced to renew the development or lease of the site by the disagreement of a landlord), a withdrawal can be allowed as an expenditure of revenue. In these type of situations, any reimbursement obtained for the removal must be depart against the expenditures experienced.

Legal Expenditures

Legal expenditures that are capital in nature are not allowable to deduct for taxpayer providing Hong Kong company registration service. Legal expenditures experienced in the accession of new assets or rights are not permissible (for example, entering into a contemporary lease or procurement of a property), but the legal expenditures experienced in the renewal of a rent are permissible, as no different asset is accessed.

Legal expenditures in defending or maintaining the subsisting commerce rights are permissible (for example, the expenses of combating the legal proceedings which summons the title to building and land was detained to be a permissible expense as discussed in the case of Borax Consolidated Limited). In the case of Tate & Lyle Ltd it was observed that, a campaign of anti-nationalization was assumed to avoid the business’ nationalization. The expenditure of the campaign was permitted.

Legal expenditures experienced in the collection of debts of commerce are permissible. If the debts are not the debts for the purpose of commerce (for example, long-term loans) or breakthroughs in the nature of speculation, the legal expenditures are not permissible. In the case of Spofforth & Prince it was observed that, legal expenditures experienced in the successful protection of a public accounting firm’s partner in the criminal movements were not permissible expenditures of the partnership.

In the case of Sheppard, it was observed that, legal expenditures for the reason of defending disciplinary movements were experienced by a stockbroking company. The proceedings concluded in charges being implemented. The legal expenditures were allowed by the House of Lords. The charges were not allowed.

In the Australian case of FCT it was observed that, legal expenses experienced by a company in protecting the lawbreaker charges against its agents and directors were premised as being ‘experienced mandatorily in carrying on the business for the reasons of producing or gaining such income’ as discussed in the Section 51 (1) of Act of Income Tax assessment 1936. The company’s interests were supposed totally involved with those of agents and directors.

In the Australian case of The Herald and Weekly Times, it was claimed by the publisher and owner of a newspaper that, a withdrawal of legal expenditures experienced in settling and protecting the backbiting actions brought against it for defamation for articles that it had issued. The withdrawal was allowed by court as being expenditures exclusively and wholly disbursed in producing or gaining its evaluate able income. The reference for these statements is taken from the Section 23 (1) (a) of Income Tax Assessment Act 1922

Charges and Penalties

A penalty or charge for breaching the law is not permissible, the penalty or fine not uncertainly arises out of the actions performed in the course of taxpayer having Hong Kong company incorporation but the responsibility to pay the penalty or fine generates from the law itself. The reference for this statement is taken from the case of Mayne Nickless Ltd. A contradiction of deductibility is required by the public policy. Criminal charges are experienced instinctively not as a trader but in the one’s personal capacity.

Instead of the differences in the relevant allowances in the constitution, the Australian and British cases were monitored in the Hong Kong in case of the D 99/01. In this case, a business of construction was carried on by the taxpayer. As a result of undermining the Noise Control Ordinance, he was fined. On the appeal, the deduction of charges was declined by the Board of Review:

  • This proposal is consistent with the position that the gains from non-legal actions are taxable.
  • According to the promotion from Australia, England and New Zealand, it would not be in the right of public policy to allow a tax evaluation to penalties or fines experienced for breaking the law.   

Tax Fees and Professional Accounting

Answering routine questions and the expenditures of proposal of tax returns are permissible. This consists of the fees of accountant. But, the expenditures of arguing an assessment is not permissible.

Subscription to the Trade Affiliations 

Where the actions of a trade affiliations are such that, if the actions are performed by an independent trader himself, the related expenditures will be evaluate able, the subscription to the affiliation will be permissible.

Tax Paid

Any tax paid by the taxpayer under the Inland Revenue Ordinance other than the tax on salaries paid in respect of the employees is not allowed by the Section 17. One can refer to the Section 16 (1) (c) and departmental interpretation and practice notes 28 for the foreign tax paid.

Usage of Private Cars and other Private Expenditures        

Expenditures acceptable to the use of cars privately are not allowable for taxpayer setting up sole proprietorship in Hong Kong. If the car is used partly for the reasons of business and partly for the private reasons, the allocation of the running devaluation and expenditures allowances is mandatory. But, in the case of a firm, the private utilization of cars by senior staff or directors may be the part of remuneration package of the employee. In this way, the complete of the running devaluation and expenditures may be permissible. The reference for this statement is taken from the case BR 3/72.

If the benefit of fringe is overreach, having regard to the nature and position of the resources of the employee, an alteration will be made to the amount of running expenditures and devaluation allowance. The reference for this statement is taken from the case D 61/91.

Sums to the Relatives

A deduction can be given if the services in the generation of accountable profits are performed by the relatives. But, it is not right that the court cannot relate with the decision of taxpayer having Hong Kong company incorporation, to pay any amount that he thinks is enough. The reference for this statement is taken from the case of Flood (William) & Sons Ltd. In the case D 53/94 it was observed that, commission and salary paid to the old parents of a taxpayer were not allowed. The payments that were experienced in the generation of accountable profits were not accepted by the board of review.



The cost of laundering the court dress and its replacement was claimed by female barrister. The cost was not allowed by the House of Lords on the basis that the dual purpose was served. As the dress enabled her to be properly and warmly dressed and it also helped her to meet the requirements of her profession. The reference for these statements is taken from the Drummond. 

Expenditures of a Jockey

In the case of D 46/02 it was observed that for gymnasium, sauna and physical training, the expenditures were claimed by the jockey. It was needed by the jockey to keep his weight below a specific limit in order to ride a horse and to keep the fitness at the same time. It was accepted by the board of review that; the expenditures were experienced for both personal and business and enable the allocation of 80:20 to the expenditures of the fitness center.


In the case of D 128/01 it was observed that, as a result of non-regular actions of a manager of a branch, potential claims were faced by a stockbroker by its clients and other parties. An allowance was made by the stockbroker for exceptional loss of amount $45 million for the feasible claims. A cost of amount $2,400,000 was experienced by the stockbroker to commission a report of investigation into weakness in internal control and management and to increase the enhancements. The investigation fee of amount $2,400,000 was not allowed by the Board of Review, however not allowed an allowance for the exceptional loss of amount $45 million on the basis that it had not been experienced. There was no such proof that the stockbroker had acknowledged the liability. Moreover, the liability had not been measured sufficiently. It was ruled out by the board of review that, the liability experienced had the allowance for loss which could be permissible.

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