Hong Kong Ordinances

INLAND REVENUE ORDINANCE - SECT 16

Ascertainment of chargeable profits

Caution: This is a past version. See the current version here.

Adaptation amendments retroactively made - see 12 of 1999 s. 3

(1) In ascertaining the profits in respect of which a person is chargeable to
tax under this Part for any year of assessment there shall be deducted all
outgoings and expenses to the extent to which they are incurred during the
basis period for that year of assessment by such person in the production of
profits in respect of which he is chargeable to tax under this Part for any
period, including-

   (a)  where the conditions set out in subsection (2) are satisfied, sums
        payable by such person by way of interest upon any money borrowed by
        him for the purpose of producing such profits, and sums payable by
        such person by way of legal fees, procuration fees, stamp duties and
        other expenses in connection with such borrowing; (Replaced 2 of 1971
        s. 11. Amended 36 of 1984 s. 4)

   (b)  rent paid by any tenant of land or buildings occupied by him for the
        purpose of producing such profits, but not exceeding, in the case of
        rent paid to the tenant's spouse, or by a partnership to one or more
        of the partners thereof or to a spouse of any such partner, an amount
        equal to the assessable value of the land or buildings; (Amended 76 of
        1975 s. 8; 8 of 1983 s. 11; 71 of 1983 s. 14)

   (c)  tax of substantially the same nature as tax imposed under this
        Ordinance, proved to the satisfaction of the Commissioner to have been
        paid elsewhere, whether by deduction or otherwise, by any corporation
        or by a person other than a corporation who carries on a trade,
        profession or business in Hong Kong, during the basis period for the
        year of assessment in respect of profits chargeable to tax by virtue
        of section 15(1)(f),

   (g)  , (i), (j), (k) or (l): (Amended 7 of 1986 s. 12; 19 of 1986 s. 3; 63
        of 1997 s. 2)
Provided that no deduction shall be made under this paragraph if the
corporation or person concerned is eligible for relief under Part VIII in
respect of such profits; (Added 73 of 1978 s. 4. Amended 36 of 1984 s. 4)

   (d)  bad debts incurred in any trade, business or profession, proved to the
        satisfaction of the assessor to have become bad during the basis 
        period for the year of assessment, and doubtful debts to the extent
        that they are respectively estimated to the satisfaction of the
        assessor to have become bad during the said basis period
        notwithstanding that such bad or doubtful debts were due and payable
        prior to the commencement of the said basis period:
Provided that-

        (i)    deductions under this paragraph shall be limited to debts which
               were included as a trading receipt in ascertaining the profits,
               in respect of which the person claiming the deduction is
               chargeable to tax under this Part, of the period within which
               they arose, and debts in respect of money lent, in the ordinary
               course of the business of the lending of money within Hong
               Kong, by a person who carries on that business; (Amended 7 of
               1986 s. 12)

        (ii)   all sums recovered during the said basis period on account of
               amounts previously allowed in respect of bad or doubtful debts
               shall for the purposes of this Ordinance be treated as part of
               the profits of the trade, business or profession for that
               basis period;

   (e)  expenditure incurred in the repair of any premises, plant, machinery,
        implement, utensil or article employed in the production of such
        profits;

   (f)  expenditure incurred in the replacement of any implement, utensil or
        article employed in the production of such profits:
Provided that no allowances have been or shall be made under the provisions of
Part VI in respect of such implement, utensil or article;

   (g)  notwithstanding section 17, a sum expended for the registration of a
        trade mark or design, or the registration or grant of a patent, used
        in the trade, profession or business which produces such profits;
        (Replaced 26 of 1969 s. 14. Amended 52 of 1997 s. 160)

   (ga) the payments and expenditure specified in sections 16B, 16C and 16E,
        as provided therein; (Amended 56 of 1993 s. 9)

   (h)  such other deductions as may be prescribed by any rule made under this
        Ordinance.

(2) The conditions referred to in subsection (1)(a) are that-

(a) the money has been borrowed by a financial institution;

   (b)  the money has been borrowed by a public utility company specified in
        the Schedule 3 at a rate of interest not exceeding the rate specified
        by the Financial Secretary by notice in the Gazette; (Amended 17 of
        1989 s. 5)

   (c)  the money has been borrowed from a person other than a
        financial institution or an overseas financial institution and the
        sums payable by way of interest are chargeable to tax under this
        Ordinance;

   (d)  the money has been borrowed from a financial institution or an
        overseas financial institution and the repayment of the principal or
        interest is not secured or guaranteed either in whole or in part, and
        whether directly or indirectly, by any instrument executed or any
        undertaking given by or on behalf of the borrower or an associate of
        the borrower against a deposit made with that or any other financial 
        institution or overseas financial institution where any sums payable
        by way of interest on the deposit are not chargeable to tax under this
        Ordinance; (Amended 7 of 1986 s. 4; 63 of 1997 s. 2)

   (e)  the money has been borrowed wholly and exclusively to finance-

        (i)    capital expenditure incurred on the provision of machinery or
               plant which qualifies for an allowance under Part VI; or

        (ii)   the purchase of trading stock, and such stock is used by the
               borrower in the production of profits chargeable to tax under
               this Part, and- (A) the lender is not an associate of the
               borrower; and (B) where the money is borrowed from, or the
               relevant sum payable by way of interest upon the money is
               payable to, a trustee of a trust estate or a corporation
               controlled by such a trustee, each of the trustee, the
               corporation and the beneficiary under the trust is not an
               associate of the borrower; (Replaced 36 of 1984 s. 4. Amended 7
               of 1986 s. 4; 63 of 1997 s. 2)

   (f)  the person chargeable to tax is a corporation and the deduction is in
        respect of interest payable by that corporation-

        (i)    on debentures;

        (ii)   to the holder of any instrument issued- (A) bona fide and in
               the course of carrying on business and which is marketable in
               Hong Kong or in a major financial centre outside Hong Kong
               approved by the Commissioner for the purposes of this
               subparagraph; or (B) in pursuance of any agreement or
               arrangements, where the issue of an advertisement or invitation
               to the public in respect of such agreement or arrangements, or
               any document which contains such an advertisement or
               invitation, has been authorized by the Securities and Futures
               Commission under section 4(2)(g) of the
               Protection of Investors  Ordinance ( Cap 335); or (Amended 10
               of 1989 s. 65)

        (iii)  on moneys borrowed from an associated corporation, where the
               moneys borrowed in the hands of the associated corporation
               arise entirely from the proceeds of an issue by the
               associated corporation of debentures or of any such instrument
               as is described in subparagraph (ii), in an amount not
               exceeding the interest payable by the associated corporation to
               the holders of its debentures or of such instruments. (Added 7
               of 1986 s. 4)

(3) In subsection (2) and this subsection- "associate" (相聯者), in
relation to a person, means-

   (a)  where the person is a natural person-

        (i)    a relative of the person;

        (ii)   a partner of the person and any relative of that partner;

        (iii)  a partnership in which the person is a partner;

        (iv)   any corporation controlled by the person, by a partner of the
               person or by a partnership in which the person is a partner;

        (v)    an director or principal officer of any such corporation as is
               referred to in subparagraph (iv);

   (b)  where the person is a corporation-

        (i)    any associated corporation;

        (ii)   any person who controls the corporation and any partner of such
               person, and, where either such person is a natural person, any
               relative of such person;

        (iii)  any director or principal officer of that corporation or of any
               associated corporation and any relative of any such director or
               officer;

        (iv)   any partner of the corporation and, where such partner is a
               natural person, any relative of such partner;

   (c)  where the person is a partnership-

        (i)    any partner of the partnership and where such partner is a
               partnership any partner of that partnership, any partner with
               the partnership in any other partnership and where such partner
               is a partnership any partner of that partnership and where any
               partner of, or with, or in any of the partnerships mentioned in
               this subparagraph is a natural person, any relative of such
               partner;

        (ii)   any corporation controlled by the partnership or by any partner
               thereof or, where such a partner is a natural person, any
               relative of such partner;

        (iii)  any corporation of which any partner is a director or
               principal officer;

        (iv)   any director or principal officer of a corporation referred to
               in subparagraph (ii); "associated corporation" (相聯法團),
               in relation to a person, means-

   (a)  a corporation over which the person has control;

   (b)  if the person is a corporation-

        (i)    a corporation which has control over the person; or

        (ii)   a corporation which is under the control of the same person as
               is the first-mentioned person; "beneficiary under the trust"
               (信託的受益人) means any person who benefits or is
               capable (whether by the exercise of a power of appointment or
               otherwise) of benefiting under a trust estate, either directly
               or through any interposed person, or who is able or might
               reasonably be expected to be able, whether directly or
               indirectly, to control the activities of the trust estate or
               the application of its corpus or income; "control" (控制), in
               relation to a corporation, means the power of a person to
               secure-

   (a)  by means of the holding of shares or the possession of voting power in
        or in relation to that or any other corporation; or

   (b)  by virtue of any powers conferred by the articles of association or
        other document regulating that or any other corporation, that the
        affairs of the first-mentioned corporation are conducted in accordance
        with the wishes of that person; "debentures" (債權證) means
        debentures listed on a stock exchange in Hong Kong or any other stock
        exchange recognized for the purposes of this paragraph by the
        Commissioner; "overseas financial institution" (海外財務機構)
        means a person carrying on the business of banking or deposit-taking
        outside Hong Kong other than a person whom the Commissioner has, in
        accordance with the powers vested in him by subsection (4), determined
        shall not be recognized for the purposes of subsection (2) as an
        overseas financial institution; "principal officer" (主要職員)
        means-

   (a)  a person employed by a corporation who, either alone or jointly with
        one or more other persons, is responsible under the immediate
        authority of the directors for the conduct of the business of the
        corporation; or

   (b)  a person so employed who, under the immediate authority of a director
        of the corporation or a person to whom paragraph (a) applies,
        exercises managerial functions in respect of the corporation;
        "relative" (親屬) means the spouse, parent, child, brother or sister
        of the relevant person, and, in deducing such a relationship, an
        adopted child shall be deemed to be a child both of the natural
        parents and the adopting parent and a step child to be the child of
        both the natural parents and of any step parent. (Replaced 63 of 1997
        s. 2)

(3A) The rate of interest which was applicable for the purposes of
subsection 2(b) immediately before this section was amended by the Inland
Revenue (Amendment)(No. 2) Ordinance 1989 (17 of 1989) shall be applicable for
the purposes of this section as amended by that Ordinance until a different
rate of interest specified by the Financial Secretary under this section as so
amended takes effect. (Section 22(1) of 17 of 1989 incorporated)

(4) The Commissioner may for the purposes of subsection (2) determine that a
person shall not be recognized as an overseas financial  institution if he is
of the opinion that that person's banking or deposit-taking business is not
adequately supervised by a supervisory authority. (Added 36 of 1984 s. 4)

(5) The amendments to this section effected by the Inland Revenue (Amendment)
Ordinance 1984 (36 of 1984) shall not have the effect of disallowing any
deduction under subsection (1)(a) which could lawfully have been made
immediately prior to the coming into force of that Ordinance where the
deduction is in respect of sums payable prior to 1 April 1984. (Added 36 of
1984 s. 4. Amended 7 of 1986 s. 4)

(6) The Chief Executive in Council may, by notice in the Gazette, amend
Schedule 3. (Added 17 of 1989 s. 5. Amended 12 of 1999 s. 3) (Replaced 28 of
1964 s. 7. Amended 35 of 1965 s. 9) "associate" (相聯者) "associated
corporation" (相聯法團) "beneficiary under the trust" (信託的受益人)
"control" (控制) "debentures" (債權證) "overseas financial institution"
(海外財務機構) "principal officer" (主要職員) "relative" (親屬)