What is the originator interest in assets for profit tax and calculation of expenses made under profit tax for taxpayer opening a business in Hong Kong?

In this blog we will explore the originator interest in assets for profit tax along with different alterations that are proposed by the certain authorities in the Inland Revenue Ordinance and the stamp duty Ordinance to attract the Mainland and multinational enterprises. In the last part of the article we will discuss the general deduction section in which we will explore some further subsections such as incurred, provision and to the extent.   

Interest of Originator in the Assets

A qualifying interest arrangement is considered as a debt arrangement and the cost of acquisition under the qualifying interest arrangement is considered as the money debited by the originator from the bond issuer as discussed in the Section 21 2(a) of Schedule 17AThe return on investment that is payable under the qualifying interest arrangement is considered as the interest payable on the remuneration debited by the originator from the bond issuer as discussed in the Section 21 2(b). The bond issuer is not considered as the owning any beneficial or legal interest in the particular asset under the specified alternative bond scheme as discussed in the Section 21 2(c). On this ground, if an arrangement of investment is a qualifying interest arrangement:

  • The bond holders, bond issuer and the bond utilizer are regarded as having null and void interest in the assets; and
  • These assets are considered as the held, acquired and discarded by the originator; and
  • The particular asset proceedings between the bond issuer and originator and asset contract between the bond utilizer and the originator are ignored.

The overall effects are:

  • Any profits, income, expenditures, losses or gains chargeable to or being raised from the assets held by the bond utilizer / bond issuer belong to the originator for the purposes of tax; and
  • The originator is qualified to the devaluation allowances affiliated with the assets, if applicable the Sections 21 (2) (c), (3), (4), (5) and (6) of Schedule 17 A.

Proposed Alterations to the Inland Revenue Ordinance and Stamp Duty Ordinance      

Taxation of regulatory capital securities and corporate treasury centers, in order to attract the mainland and multinational enterprises for the purpose of establishing the central treasury function in the state of Hong Kong, on 4th of December 2015, the Inland Revenue (Amendment) (No. 4) Bill 2015 was gazette. The bill pursues to alter the Inland Revenue ordinance to give concession on profits tax to the qualifying centers of corporate treasury (QCTCs). At the half of the rates of profit tax, the qualifying profits will be charged. The key point to note here is that, an institution of finance is not eligible to be a qualifying corporate treasury centers. Concerning the particular conditions, a corporate borrower being carried on an intra-group business of finance in Hong Kong will be given the deduction for interest due on the money debited from an affiliated corporation not based in Hong Kong. (In the current scenario the withdrawal is not allowed since the moneylender is not subject to evaluation for tax in Hong Kong as discussed in the Section 16 2(c) unless the Sections 16 2(a), (b), (d), (e) or (f) is fulfilled).

The bill described also pursues to:

  • Serve regulatory capital securities (RCSs) as the securities of debt.
  • To alter the Stamp Duty Ordinance to relief on stamp duty to Regulatory Capital Securities in a way that:
  • Any other type of regulatory capital securities’ transfer is exempt under heads 2(3) and 3(4) from stamp duty, and
  • A note of contract is not required to be stamped or executed for the purchase or sale of a regulatory capital securities.

Profits Tax: Expenses

Section of General Deduction

In the Section 16 (1) of Inland Revenue Ordinance, the statue law regulating the deductions in general is intend. The deductions of all expense and outgoings was allowed by it to the extent to which they are included during the assessment year’s basis period in the generation of profits that are evaluate able to tax on profit for any term.


After opening a business in Hong Kong the expenditures that are not paid yet but included may or may not be allowable. The meanings of ‘incurred’ is that, there is a commitment for sure, or where the taxpayer having Hong Kong corporation registration completely himself is subject to the liability as discussed in the case of James Flood Pty Ltd (1953). This must be an already existing liability. A withdrawal can be allowed given that the liability cannot be assured precisely, even though it have capability of reasonable approximation. The definition of the word ‘incurred’ was supposed by the court of appeal in case of the National Mutual Centre Ltd (HK) (1998). In that case, a remuneration of money was debited by the taxpayer from the association of banks (the primary loan) and additional sum from its parent or primary company (the secondary loan). The parent or primary company was the subordinated lender while the banks were the principal lender. An agreement was happened between the parent company and banks that interest on the additional sum from its parent company was to be paid once primary loan is settled. It was accepted by the court of appeal that, the interest on the further sum from its parent company (secondary loan) having start up business Hong Kong which had accumulated but was not payable yet was ‘incurred’ within the meanings of Section 16 (1) of Inland Revenue Ordinance and ‘payable’ as in the meanings of Section 16 1(a), and allowed the withdrawal of tax.

Contingent Liabilities  

After Hong Kong corporation registration the tax is not allowed on the contingent liabilities. Though, a withdrawal for a contingent liability is allowed once the liability becomes definite. As discussed in the case of Cosmotron Manufacturing Ltd. Comparing with the position in the tax on salaries where a contingent liability is not withdrawable though it has become definite. The reference for this statement is taken from the case of Franco Tong Sui.


According to the proceeding of the case of Lo & Lo (1984) a provision may be evaluate able given that earlier described conditions are fulfilled.              

Chargeable Profits’ Production

Expenses are not evaluating if these are incurred in the production of non-taxable profit or offshore profits. Non-taxable profits here include dividend or capital profit. Expenses of an activity that are unable to bring any income are withdrawable if the expenditures have been included with a view to producing profits that are chargeable.

In the Hong Kong the British test is followed. The word ‘for the purpose of trade’ is used by the British Statue. In the case of Strong & Co of Romsey Ltd. it was observed that, this word was interpreted as ‘for the reason of allowing a person to earn the profits in trade’. This was supposed to be identical to ‘in the production of accountable profits’ in Hong Kong. The reference for this statement is taken from the case of Privy Council in Cosmotron Manufacturing Co Ltd (1997).

It is not just sufficient that, expenditures are raised out of or made in course of or is connected with the trade. Let’s take an example, in the case of Strong and Co of Romsey Ltd, remuneration paid to a visitor to a hotel who experienced an injury at the hotel was not allowed for the purpose of tax as not being the sum expanded for the purpose of the trade.

In case of the Chu Fung Chee it was observed that, Bar Association subjected a barrister to the disciplinary transactions. It was required by him to bear the cost. The cost was consisted of the expenditures and legal fees of the disciplinary transactions. The court of first instance disallowed these expenses and this overruled the board of review. The behavior for which taxpayer having start up business Hong Kong was drilled arose from the matters that were not related to his professional practices. Even though the results of the disciplinary transactions would severely affect his practice, the court of first instance was not influenced that the expenditures incurred in the chargeable profits’ production. The expenditures were for protecting his practice as barrister, and hence were the capital expenditures that were not deductible under the Section 17 1(c) of Inland Revenue Ordinance.

Although the same test of ‘in the production of accountable’ income / profits, is used by the salaries tax and tax on profits, but the test is a lot less strict under tax on profits that equates it to ‘for the reason of enabling a person to earn the profits in trade’. In the tax on salaries, ‘in the making of chargeable income’ means ‘in the course of executing the duties of the office / employment’. The reference for these statements is taken from the case of Franco Tong Sui Lun. 

For any term of Basis Period

It is not mandatory that, an expenditure is only accountable in that basis period in which the taxpayer whose Hong Kong small business start up has his associated income brought into account. The withdrawal of expenditures included in the chargeable income’s production for any period as discussed in the case of Lo & Lo, Secan Ltd. In order to qualify for the withdrawal for the assessment year, the expenditures must be included in the basis period of that assessment year. The expenditures may be withdrawn within the basis period in which the expenditure is included although the homologous income may be evaluate for the tax in a following or prior assessment year. (One can refer to the comments on the deduction of tax on profits by the council of Inland Revenue Department in the case of the Franco Tung Sui, in salaries tax).

‘To the Extent’ 

The expenditures shall be divided that are incurred partly in the production of accountable profits and partly for the other purposes. The portion that is only attributable to the chargeable profit’s production can be allowed, as discussed in the case of Tai Hing per Deputy High Court Judge Poon. In accordance with the IRR 2A, the division shall be made on such grounds as is most suitable to the trade’s activities, business or profession concerned.

The word ‘to the extent’ is used by the Inland Revenue Ordinance not ‘exclusively or wholly’ (same wording as that of South African or British Tax). In the case of Zeta Estates Ltd (2007) it was observed that, after completion of the project of property development, a property development had considerable profits. A dividend was declared by it. No payment was made by it in actual. The dividend was like as the loans from the holders of share on which the interest was payable to the holders of share. This was due to the reason that; the assets of company consist of properties after development. In order to pay the dividend, the company had no available means. It was highly illiquid even though it was highly profitable. In order to pay for the dividend, it was required by the company to sell its properties. And company was not willful to do so. The deduction was claimed by the company on the basis that, the loan of shareholder replaced its working capital. The deduction was disallowed by the board of review and it was considered by it that, in order to finance the payment of dividend the loan was used. The court of appeal and court of first supported the arguments of board of review. And as a result, the deduction was allowed by the court of final appeal. The Australian tax law was followed by the court of final appeal. The word ‘to the extent’ was used by Australian tax law, and it was not used by the South African tax law. It was not the responsibility of the Inland Revenue Department and the court to query the decision of the company in order to declare a dividend and pay the interest on the debt on the dividend from shareholders. That was not a noncommercial decision.

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