Tax-Deductible Expenses in Hong Kong: An SME Checklist

In Hong Kong, a business expense is deductible for profits tax to the extent it is incurred in producing chargeable profits (section 16 of the Inland Revenue Ordinance). Private, capital and insurance-recoverable costs are barred (section 17). On top of that general rule sit specific concessions. Qualifying R&D attracts a 300% deduction on the first HK$2,000,000, computer hardware and software is written off 100% at once, and employer MPF is deductible up to 15% of each employee's pay. Records must be kept for 7 years.

Last reviewed: September 2026 · Sources: IRD, Inland Revenue Ordinance (Cap. 112)

The two rules that decide everything

Almost every question about deductibility comes back to two sections of the Inland Revenue Ordinance.

Section 16 allows outgoings and expenses "to the extent to which they are incurred" in producing profits chargeable to tax. The words "to the extent" matter: a mixed-use cost, such as a phone or a car, is deductible in part, not in full or not at all.

Section 17 then prohibits certain categories outright, even where a business link exists. These include:

• domestic or private expenses;
• capital expenditure, capital losses and the cost of improvements;
• sums recoverable under insurance or an indemnity;
• rent of premises not used to produce the profits;
• taxes under the Ordinance, other than salaries tax paid on employees' behalf;
• in unincorporated businesses, pay, interest on capital and MPF for the proprietor, partners and their spouses.

Capital spending is not lost, though. Most of it comes back through capital allowances, covered below.

The deductibility checklist

The table below draws on the IRD's Brief Guide to Taxes 2025/26 and the BIR51 notes and instructions. It covers the items SMEs ask about most often.

Two items catch many owners out. First, a director's salary from a limited company is deductible, because the company and the director are separate persons, while a sole proprietor's "salary" to themselves is not. Second, the charitable donations cap is measured against assessable profits before losses brought forward are set off.

Capital spending: write-offs and allowances

Capital expenditure is added back in the tax computation, then relieved through one of several regimes. The difference between them is timing: some give the full deduction in the year of purchase, others spread it over years.

When pooled plant is sold for more than the pool's reducing value, the excess is taxed as a balancing charge. When a business ends with no successor, any unrelieved balance becomes a balancing allowance.

Worked example: HK$100,000 of equipment

A company buys HK$100,000 of computers and HK$100,000 of office furniture. For illustration, assume the furniture sits in a 20% pool.

Computers: HK$100,000 is deducted in full in the year of purchase.

Furniture, first year:

1. Initial allowance: HK$100,000 × 60% = HK$60,000
2. Reducing value: HK$100,000 − HK$60,000 = HK$40,000
3. Annual allowance: HK$40,000 × 20% = HK$8,000
4. First-year allowances: HK$60,000 + HK$8,000 = HK$68,000

In the second year, the annual allowance is 20% of the remaining HK$32,000, or HK$6,400, and so on. Keeping a fixed-asset register with tax pools alongside accounting depreciation saves rebuilding these numbers each year.

The R&D super-deduction

Enhanced R&D deductions are the most valuable concession on the list, and the most often misunderstood. The IRD's FAQ on supplementary form S3 splits R&D spending into two types:

• Type B qualifies for 300% on the first HK$2,000,000 and 200% on the rest. It covers payments to designated local research institutions, plus two kinds of in-house spending: staff directly and actively engaged in qualifying R&D, and consumables used directly in it. The activity must be wholly carried on in Hong Kong.
• Type A is all other R&D spending, such as payments to overseas universities or consultancy fees. It gets an ordinary 100% deduction.

Worked example

A software company spends HK$2,500,000 of Type B expenditure in a year, mostly salaries of engineers working directly on a qualifying project.

1. First HK$2,000,000 × 300% = HK$6,000,000
2. Remaining HK$500,000 × 200% = HK$1,000,000
3. Total deduction = HK$7,000,000

That is HK$4,500,000 more than the cash spent. If the company has enough profit taxed at 16.5%, the extra deduction is worth up to HK$4,500,000 × 16.5% = HK$742,500 of tax. The claim is made on form S3, and the IRD will expect project records showing who worked on what, and when.

Receipts become evidence only once they are in the books. JetFlow's hot-folder reads receipts and supplier invoices with AI OCR and posts them into the ledger, and the expense module ties each claim to a category and approver. See how JetFlow handles expense capture.

Grey areas: home office, cars and entertainment

None of these has a fixed statutory percentage. Each is decided by the "to the extent" test in section 16 and the private-expense bar in section 17.

Home office. A sole proprietor working from home may claim a reasonable proportion of rent and utilities for space genuinely used for the business. Expect the IRD to ask how the proportion was calculated. A room used only for business is far easier to support than a dining table used in the evenings.

Motor vehicles. Running costs and capital allowances are reduced for any private use. A logbook, or at least a documented basis for the business percentage, is the usual evidence.

Entertainment. Hong Kong has no blanket ban. Client meals and hospitality are deductible where they are incurred in earning the profits, but family dinners and other private hospitality charged to the business are not. Record who attended and the business purpose on the receipt or in the expense claim.

Keeping the records that support a claim

Every person carrying on business in Hong Kong must keep sufficient records, in English or Chinese, to allow assessable profits to be readily worked out. Records must be kept for at least 7 years after the transactions they relate to. Failing to keep sufficient records can lead to a fine of HK$100,000.

In practice, that means keeping invoices, receipts, bank statements, contracts, payroll records and the working papers behind the tax computation. A good month-end routine, set out in our month-end close checklist, keeps the evidence current rather than reconstructed at year-end.

Common mistakes

• Deducting the depreciation charge. Accounting depreciation is always added back; claim capital allowances instead.
• Expensing improvements as repairs. Replacing like with like is a repair; upgrading or extending is capital.
• Claiming 300% on all R&D. Only Type B expenditure, wholly carried on in Hong Kong, is enhanced; consultancy fees are not.
• Paying the proprietor through the business. In a sole proprietorship or partnership, the owner's pay and MPF are not expenses.
• Deducting fines and penalties. They are added back, including government penalties and late-payment surcharges on tax.
• Missing the IP associate rule. Intellectual property bought from an associate or related person earns no deduction.
• Discarding receipts after filing. The 7-year retention period runs from the transaction, not from the return.

Frequently asked questions

What expenses are tax deductible in Hong Kong?

Any expense incurred in producing profits chargeable to Hong Kong profits tax, to the extent it was so incurred. Common examples include staff costs, employer MPF up to 15% of each employee's pay, rent, repairs, bad debts and qualifying interest. Private and capital costs are excluded, though capital items usually attract allowances.

Can I deduct entertainment expenses for profits tax?

Yes, to the extent they are incurred in earning the business's profits. There is no fixed cap, but private hospitality is not deductible. Keep the attendees and business purpose on record.

Is computer equipment 100% deductible in Hong Kong?

Yes. Capital expenditure on computer hardware and software is written off in full in the year of purchase. So is plant and machinery specifically related to manufacturing, and specified environmental protection facilities.

How does the 300% R&D tax deduction work?

Qualifying Type B expenditure, mainly R&D wholly carried on in Hong Kong and payments to designated local research institutions, is deductible at 300% on the first HK$2,000,000 and 200% above that. Other R&D spending is deductible at 100%. The claim is made on supplementary form S3.

How long must I keep business records in Hong Kong?

At least 7 years after the completion of the transactions they relate to. Records must be sufficient to allow assessable profits to be readily ascertained. Failure can lead to a fine of HK$100,000.

Can a sole proprietor deduct their own MPF contributions?

Yes, mandatory contributions as a self-employed person are deductible up to HK$18,000 a year. Contributions made for a spouse are not deductible. The proprietor's own drawings or "salary" are never deductible.

Key takeaways

• Section 16 allows expenses to the extent they produce chargeable profits; section 17 bars private, capital and recoverable costs.
• Employer MPF is deductible up to 15% of each employee's pay; self-employed MPF up to HK$18,000 a year.
• Computer hardware and software is written off 100%; other plant attracts a 60% initial allowance plus annual allowances.
• Qualifying domestic R&D earns 300% on the first HK$2,000,000 and 200% above.
• Keep records for at least 7 years; the fine for insufficient records is up to HK$100,000.

Deductions translate directly into the tax rates explained in our guide to the 8.25% two-tiered rate, and they are claimed through the computation filed with your BIR51 return. A clean ledger, with receipts attached and assets registered, makes that computation straightforward. Start free with JetFlow to keep expenses, assets and books in one place.

This article is general information, not tax advice. Check your position with the IRD or a qualified tax adviser before acting.