Hong Kong Ordinances
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INLAND REVENUE ORDINANCE - SECT 16
Ascertainment of chargeable profits
(Past version on 01/04/2003).
(Past version on 17/04/1998).
(Past version on 01/07/1997).
(Past version on 30/06/1997).
(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 condition for the application of this paragraph is satisfied
under subsection (2), and subject to subsections (2A), (2B) and
(2C), sums payable by such person by way of interest on 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, 12 of 2004 s. 6)
(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(a)) 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 16AA, 16B, 16C, 16E,
16F and 16G as provided therein; (Added 35 of 1965 s. 9. Amended 56 of 1993 s.
9; 31 of 1998 s. 8; 32 of 1998 s. 6)
(h) such other deductions as may be prescribed by any rule made under this
Ordinance.
(2) The condition for the application of subsection (1)(a) is satisfied if-
(Amended 12 of 2004 s. 6)
(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; (Replaced 12 of 2004 s. 6)
(e) the money has been borrowed wholly and exclusively to finance-
(i) capital expenditure on the provision of machinery or plant
incurred by the borrower, where such expenditure qualifies for
an allowance under Part VI; or
(ii) the purchase of trading stock by the borrower, where the
trading stock purchased is used by the borrower in the
production of profits chargeable to tax under this Part, and-
(iii) the lender is not an associate of the borrower; and
(iv) where the lender is a trustee of a trust estate or a
corporation controlled by such a trustee, neither the trustee
nor the corporation nor any beneficiary under the trust is the
borrower or an associate of the borrower; or (Replaced 12 of
2004 s. 6)
(f) the borrower is a corporation and the deduction claimed is in respect
of interest payable by it-
(i) on debentures listed on a stock exchange in Hong Kong or on any
other stock exchange recognized by the Commissioner for the
purposes of this subparagraph;
(ii) on instruments (other than debentures described in subparagraph
(i))- (A) issued bona fide and in the course of carrying on
business and marketed in Hong Kong or in a major financial
centre outside Hong Kong recognized by the Commissioner for the
purposes of this sub-subparagraph; or (B) issued pursuant to
any agreement or arrangements, where the issue of an
advertisement, invitation or document in respect of the
agreement or arrangements has been authorized by the Securities
and Futures Commission under section 105 of the
Securities and Futures Ordinance ( Cap 571), and the
advertisement, invitation or document has been issued to the
public; or
(iii) on money borrowed from an associated corporation of the
borrower, where the money borrowed in the hands of the
associated corporation arises entirely from the proceeds of an
issue by the associated corporation of debentures described in
subparagraph (i) or of instruments described in subparagraph
(ii), in an amount not exceeding the interest payable by the
associated corporation to the holders of such debentures or
instruments. (Replaced 12 of 2004 s. 6)
(2A) Where-
(a) the condition for the application of subsection (1)(a) is satisfied
under subsection (2)(c), (d) or (e);
(b) at any time during the basis period of the borrower for the
year of assessment concerned, the payment of any sum payable by way of
principal or interest in respect of the money borrowed is secured or
guaranteed, whether wholly or in part and whether directly or
indirectly, by a deposit or loan made by the borrower or an associate
of the borrower with or to-
(i) the lender or an associate of the lender;
(ii) a financial institution or an associate of a financial
institution; or
(iii) an overseas financial institution or an associate of an
overseas financial institution; and
(c) any sum payable by way of interest on the deposit or loan is not
chargeable to tax under this Ordinance, the amount of the deduction
which, but for this subsection and subsections
(2B) and (2C), would have been allowed under subsection (1)(a) for the
year of assessment concerned in respect of sums payable by the borrower by way
of interest on the money borrowed shall be reduced, having regard to the sum
payable by way of interest on the deposit or loan, by an amount calculated on
such basis as is most reasonable and appropriate in the circumstances of the
case. (Added 12 of 2004 s. 6)
(2B) Where-
(a) the condition for the application of subsection (1)(a) is satisfied
under subsection (2)(c), (d) or (e); and
(b) at any time during the basis period of the borrower for the
year of assessment concerned, arrangements are in place, whether
between the borrower and the lender or otherwise, whereby any sum
payable by way of interest on the money borrowed or on any part of the
money borrowed is payable, whether directly or through any interposed
person, to the borrower or to a person (other than the lender) who is
connected with the borrower and in either case the borrower or the
person, as the case may be, is not an excepted person as defined in
subsection (2E)(c), the amount of the deduction which, but for this
subsection and subsections
(2A) and (2C), would have been allowed under subsection (1)(a) for the
year of assessment concerned in respect of sums payable by the borrower by way
of interest on the money borrowed or on the relevant part of the money
borrowed, as the case may be, shall be reduced by an amount calculated in
accordance with the following formula-
A
B
x C
where: A means the total number of days during the basis period of the
borrower for the year of assessment concerned, at the end of each of which the
principal in respect of the money borrowed or in respect of the relevant part
of the money borrowed, as the case may be, is outstanding and the arrangements
are in place;
B means the total number of days during the basis period of the borrower for
the year of assessment concerned, at the end of each of which the principal in
respect of the money borrowed or in respect of the relevant part of the money
borrowed, as the case may be, is outstanding; and
C means the total amount of sums payable by the borrower by way of interest on
the money borrowed or on the relevant part of the money borrowed, as the case
may be, which, but for this subsection and subsections (2A) and (2C), would
have been deductible under subsection
(1)(a) for the year of assessment concerned. (Added 12 of 2004 s. 6)
(2C) Subject to subsection (2G), where-
(a) the condition for the application of subsection (1)(a) is satisfied
under subsection (2)(f); and
(b) at any time during the basis period of the borrower for the year of
assessment concerned, arrangements are in place, whether between the
borrower and the holders of the debentures or instruments concerned or
otherwise, whereby any sum payable by way of interest on the
debentures or instruments concerned or on any interest in the
debentures or instruments concerned is payable, whether directly or
through any interposed person, to the borrower or to a person who is
connected with the borrower and in either case the borrower or the
person, as the case may be, is not an excepted person as defined in
subsection (2F)(c), the amount of the deduction which, but for this
subsection and subsections
(2A) and (2B), would have been allowed under subsection (1)(a) for the
year of assessment concerned in respect of-
(c) (where the condition for the application of subsection (1)(a) is
satisfied under subsection (2)(f)(i) or (ii)) the sum payable by the
borrower by way of interest on the debentures or instruments concerned
or on the relevant interest in the debentures or instruments
concerned, as the case may be; or
(d) (where the condition for the application of subsection (1)(a) is
satisfied under subsection (2)(f)(iii)) the sum payable by the
borrower by way of interest on money borrowed from the
associated corporation, being money arising entirely from the proceeds
of the issue of the debentures or instruments concerned or of the
relevant interest in the debentures or instruments concerned, as the
case may be, shall be reduced by an amount calculated in accordance
with the following formula-
X
Y
x Z
where: X means the total number of days during the basis period of the
borrower for the year of assessment concerned, at the end of each of which the
principal in respect of the debentures or instruments concerned or in respect
of the relevant interest in the debentures or instruments concerned, as the
case may be, is outstanding and the arrangements are in place;
Y means the total number of days during the basis period of the borrower for
the year of assessment concerned, at the end of each of which the principal in
respect of the debentures or instruments concerned or in respect of the
relevant interest in the debentures or instruments concerned, as the case may
be, is outstanding; and
Z means the total amount of sums referred to in paragraph (c) or (d), as the
case may be, which, but for this subsection and subsections (2A) and
(2B), would have been deductible under subsection (1)(a) for the year of
assessment concerned. (Added 12 of 2004 s. 6)
(2D) For the purposes of subsection (2A), if a deposit or loan is made by a
trustee of a trust estate or a corporation controlled by such a trustee, the
deposit or loan shall be deemed to have been made by each of the trustee, the
corporation and the beneficiary under the trust. (Added 12 of 2004 s. 6)
(2E) For the purposes of subsection (2B)-
(a) any reference in that subsection to any sum payable by way of interest
on the money borrowed or on any part of the money borrowed, however
described, shall be construed as including a reference to any sum
payable by way of principal or interest in respect of any other loan,
where the payment of such sum is-
(i) secured or guaranteed, whether wholly or in part and whether
directly or indirectly, by any sum payable by way of principal
or interest in respect of the money borrowed or in respect of
any part of the money borrowed; or
(ii) conditional, whether wholly or in part and whether directly or
indirectly, on the payment of any sum payable by way of
principal or interest in respect of the money borrowed or in
respect of any part of the money borrowed;
(b) if any sum payable by way of interest on the money borrowed or on any
part of the money borrowed, as construed in accordance with paragraph
(a), is payable, whether directly or through any interposed person, to
a trustee of a trust estate or a corporation controlled by such a
trustee, such sum shall be deemed to be so payable to each of the
trustee, the corporation and the beneficiary under the trust; and
(c) "excepted person" (除外人士) means-
(i) a person who is chargeable to tax under this Ordinance in
respect of any sum payable by way of interest on the money
borrowed or on any part of the money borrowed, as construed in
accordance with paragraph (a);
(ii) in the case of a person (other than the lender) who is
connected with the borrower- (A) a person who is entitled to
any sum referred to in subparagraph (i) in the capacity of- (I)
a person acting as a trustee of a trust estate or holding
property belonging to others pursuant to the terms of a
contract, where the person is not beneficially entitled to the
sum in question; (II) a beneficiary of a unit trust to which
section 26A(1A)(a)(i) or (ii) applies, where the sum in
question is payable to a trustee of the unit trust in respect
of a specified investment scheme referred to in section 26A
(1A)(b); or (III) a member of a retirement scheme which is
either a recognized retirement scheme or a substantially
similar retirement scheme established outside Hong Kong, where
the Commissioner is satisfied that the latter scheme complies
with the requirements of a supervisory authority within an
acceptable regulatory regime; (B) a public body; (C) a body
corporate, where the Government owns beneficially more than
half in nominal value of the issued share capital of that body
corporate for the time being; or (D) a financial institution or
an overseas financial institution. (Added 12 of 2004 s. 6)
(2F) For the purposes of subsection (2C)-
(a) any reference in that subsection to any sum payable by way of interest
on the debentures or instruments concerned or on any interest in the
debentures or instruments concerned, however described, shall be
construed as including a reference to any sum payable by way of
principal or interest in respect of any other loan, where the payment
of such sum is-
(i) secured or guaranteed, whether wholly or in part and whether
directly or indirectly, by any sum payable by way of principal
or interest in respect of the debentures or instruments
concerned or in respect of any interest in the debentures or
instruments concerned; or
(ii) conditional, whether wholly or in part and whether directly or
indirectly, on the payment of any sum payable by way of
principal or interest in respect of the debentures or
instruments concerned or in respect of any interest in the
debentures or instruments concerned;
(b) if any sum payable by way of interest on the debentures or instruments
concerned or on any interest in the debentures or instruments
concerned, as construed in accordance with paragraph (a), is payable,
whether directly or through any interposed person, to a trustee of a
trust estate or a corporation controlled by such a trustee, such sum
shall be deemed to be so payable to each of the trustee, the
corporation and the beneficiary under the trust; and
(c) "excepted person" (除外人士) means-
(i) a person who is chargeable to tax under this Ordinance in
respect of any sum payable by way of interest on the debentures
or instruments concerned or on any interest in the debentures
or instruments concerned, as construed in accordance with
paragraph (a);
(ii) in the case of a person who is connected with the borrower- (A)
a person who is entitled to any sum referred to in subparagraph
(i) in the capacity of- (I) a person acting as a trustee of a
trust estate or holding property belonging to others pursuant
to the terms of a contract, where the person is not
beneficially entitled to the sum in question; (II) a
beneficiary of a unit trust to which section 26A(1A)(a)(i) or
(ii) applies, where the sum in question is payable to a trustee
of the unit trust in respect of a specified investment scheme
referred to in section 26A (1A)(b); or (III) a member of a
retirement scheme which is either a recognized
retirement scheme or a substantially similar retirement scheme
established outside Hong Kong, where the Commissioner is
satisfied that the latter scheme complies with the requirements
of a supervisory authority within an acceptable regulatory
regime; (B) a public body; (C) a body corporate, where the
Government owns beneficially more than half in nominal value of
the issued share capital of that body corporate for the time
being; or (D) a financial institution or an
overseas financial institution. (Added 12 of 2004 s. 6)
(2G) Subsection (2C) shall not apply where under the relevant arrangements,
the relevant sum payable by way of interest on the debentures or instruments
concerned or on any interest in the debentures or instruments concerned is
payable to a market maker who, in the ordinary course of conduct of his trade,
profession or business in respect of market making, holds such debentures or
instruments or such interest for the purpose of providing liquidity thereof.
(Added 12 of 2004 s. 6)
(2H) In subsection (2G), "market maker" (市場莊家) means a person who-
(a) is licensed or registered for dealing in securities under the
Securities and Futures Ordinance ( Cap 571) or authorized to do so by
a regulatory authority in a major financial centre outside Hong Kong
recognized by the Commissioner for the purposes of subsection
(2)(f)(ii)(A);
(b) in the ordinary course of conduct of his trade, profession or business
in respect of market making holds himself out as being willing to buy
and sell securities for his own account and on a regular basis; and
(c) is actively involved in market making in securities issued by a wide
range of unrelated institutions. (Added 12 of 2004 s. 6)
(3) In this section- (Amended 12 of 2004 s. 6)
"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;
"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 this
section as an overseas financial institution; (Amended 12 of 2004 s. 6)
"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) In this section-
(a) a corporation shall be regarded as being controlled by a person if the
person has the power to secure-
(i) by means of the holding of shares or the possession of voting
power in or in relation to that or any other corporation; or
(ii) by virtue of any power conferred by the articles of association
or any other document regulating that or any other corporation,
that the affairs of the first-mentioned corporation are
conducted in accordance with his wishes; and
(b) a person (other than a corporation) shall be regarded as being
controlled by another person if the first-mentioned person is
accustomed or under an obligation, whether express or implied, and
whether or not enforceable or intended to be enforceable by legal
proceedings, to act, in relation to his investment or business
affairs, in accordance with the directions, instructions or wishes of
that other person. (Added 12 of 2004 s. 6)
(3B) In this section, a person shall be regarded as being connected with a
borrower if the person is-
(a) an associated corporation of the borrower;
(b) a person (other than a corporation)-
(i) who controls the borrower;
(ii) who is controlled by the borrower; or
(iii) who is under the control of the same person as is the borrower.
(Added 12 of 2004 s. 6)
(4) The Commissioner may for the purposes of this section 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.
Amended 12 of 2004 s. 6)
(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)
(5A) The amendments made to this section by section 6(a), (b), (c), (d),
(e) and (f) of the Inland Revenue (Amendment) Ordinance 2004 (12 of 2004)
("the Amendment Ordinance") do not apply to sums described in subsection
(1)(a) which were incurred-
(a) before the commencement# of the Amendment Ordinance;
(b) under a transaction which was the subject of an application for
advance clearance made to the Commissioner before 1 April 1998, and
the Commissioner has before the commencement# of the Amendment
Ordinance expressed the opinion that the transaction would not fall
within the terms of section 61A; or
(c) under an arrangement which was the subject of an application made to
the Commissioner under section 88A, and the Commissioner has before
the commencement# of the Amendment Ordinance made a ruling under that
section that the arrangement would not fall within the terms of
section 61A. (Added 12 of 2004 s. 6)
(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; 12 of 2004 s. 6)
___________________________________________________________________________
____ Notes:
* The amendment made by Ord. No. 31 of 1998 to section 16(1)(ga) applies in
relation to the year of assessment commencing on 1 April 2000 and to all
subsequent years of assessment. (31 of 1998 s. 2(2); L.N. 175 of 2000)
# Commencement date: 25 June 2004.
"excepted person" (除外人士)
"market maker" (市場莊家)
"associate" (相聯者)
"associated corporation" (相聯法團)
"beneficiary under the trust" (信託的受益人)
"overseas financial institution" (海外財務機構)
"principal officer" (主要職員)
"relative" (親屬)
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