Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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Profits Tax - Employees' expenditure 

Generally speaking, almost all kinds of expenditure for the benefit of employees is deductible. This includes the reward for staff's work and cost for promotion of good relationship with staff.  

The deductible payments include:

  • salaries, wages, commissions… etc

  • year-end bonus

  • various kinds of leave pay

  • cost of various kinds of staff benefits

  • severance payment or long service payment under labor law

  • funeral expenses or funeral allowance to the relatives of a deceased employee

  • grants or subsidies to the relatives of a deceased employee

  • payments involving sickness or injury of employee

If excessive severance payment or long service payment are paid on cessation of business, they may be non-deductible. This is because they are regarded as not incurred in the production of profits.

In the case CIR v Cosmotron Manufacturing Co. Ltd. 4 HKTC 562, the Privy Council held that the severance paid in accordance with employment law on cessation of business was deductible.

Small gifts to employees on their marriages are allowable because they will promote good staff relationship. But large gifts may not be deductible because they are likely to be made out of personal reasons.

Some overseas companies having permanent establishments in Hong Kong uses salaries payments to expatriate employees to reduce tax. These expatriate employees are employed to provide services both within and outside Hong Kong. If they stay in Hong Kong for not more than 60 days, they will be exempt from Salaries Tax. On the other hand, their employer can claim full deduction for the salaries payment if their services are incurred in the production of assessable profits.

Losses made by embezzlement or misappropriation by an employee (other than a director) may be allowed on the grounds that they are arising out of and incidental to the carrying of the trade --- vide Curtis versus J. G. Oldfield. 9 TC 319.

Contributions to approved retirement schemes:

  • Special contributions, including initial contribution to set up the fund, are allowed by spreading equally over 5 years of assessment – Section 16A(2) of Inland Revenue Ordinance. 

  • Regular contributions made by employer are deductible up to a “15% limit”: the deduction for each employee is restricted to15% of his total income. No deduction is allowed for the excessive contribution. Regular contribution consists of the employer's mandatory and voluntary contribution under Mandatory Provident Fund Scheme. 

Click here for MPF Schemes concerning a self-employed person 

 

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