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 - Fines and penalties on breaking the law

In the case CIR vers Alexander von Glehn & Co. Ltd. 12 TC 232, the company paid certain fines because they sold certain goods that are prohibited by law. It was held that although the fines were incurred in the course of the trade, they were not made for earning profits. As such, they were not deductible.The judge said :

"You may say that the penalty has been connected with the trade, because if the trade has not been carried on the penalty would not have been incurred; there would not have been an opportunity for the breach of the law which took place; but in the sense in which the words are used in the Act, I do not think that this was connected with or arising out of such trade, manufacture, adventure or concern, and still less do I think that it was a disbursement under the First Rule which applies to the first two Cases, that is to say, 'money wholly and exclusively laid out or expended for the purposes of such trade'. During the course of the trading, this company committed a breach of the law. As I say, it has been agreed that they did not intend to do anything wrong in the sense that they were willingly and knowingly sending these goods to an enemy destination; but they committed a breach of the law, and for that breach of the law, they were fined, and that does not seem to me to be a loss connected with the business, but it is a fine imposed upon the company personally, as far as a company can be a person, for a breach of the law which they had committed."

On the other hand, the income, if it is a trading receipt, generated from breaking the law is taxable .

As a general rule, penalties and fines are not deductible. Such non-deductible expenses includes not only the penalties under the IRO but also the penalties under other Ordinances. Besides, the expenses incurred for  tax appeal are not deductible either: that is because they are not incurred in the production of assessable profits. However, if the legal expenses are incurred in the ordinary course of business, for example for collection of trade debts, they will be tax deductible. 

So, take my advice: (1) Beware of your legal obligation; (2) Never break the law; the cost for breaking the law is far more than tax implications --- it may ruin you life! (3) Know the law well --- learn your rights and obligations --- as far as taxation is concerned, read my tax tips on this web site --- they are easy to read --- and above all: no charge!


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