Charitable Organization exempts from Profits Tax

According to Section 2 of the Inland Revenue Ordinance, “Approved charitable donation” means a donation of money to any charitable institution or trust of a public character, which is exempt from tax under section 88 of the Inland Revenue Ordinance, or to the Government, for charitable purposes. We have experience in helping clients who wish to have its organization granted as a charitable entity and exempted from profits tax in Hong Kong.

Inland Revenue Department has issued an information pamphlet entitled “A tax guide for charitable institutions and trusts of a public character” for reference by the public. Below are the key summary for your easy reference before you decide to apply for your company to be a charitable organization to exempt from profits tax in Hong Kong:

For practical purposes, the judgement of Lord MacNaghten in the case of I T Special Commissioners v Pemsel (3 TC 53) is regarded as an authoritative summary of the purposes that may be accepted as charitable. These are: –

  1. relief of poverty;
  2. advancement of education;
  3. advancement of religion; and
  4. other purpose of a charitable nature beneficial to the community in Hong Kong.

In addition, where a trade or business is carried on by any such charitable organization or trust, the profits derived from such trade or business would be exempted from Hong Kong Profits Tax only if all 3 conditions are fulfilled:

  1. Such profits are applied solely for charitable purpose and;
  2. Such profits are not expended substantially outside Hong Kong and;
  3. Either the trade or business is exercise in the course of the actual carrying out of expressed objectives; or the work in connection with the trade or business is mainly carried on by persons for whose benefit such institution or trust is established.

It is essential that a charity is established by a written governing instrument. The type of instrument adopted will depend on the particular circumstances pertaining to the charity proposed and the preference of the promoters or founders. Most common types of structures are:

  • a society established under the Societies Ordinance (Cap 151);or
  • a company incorporated under the Companies Ordinance (Cap 622);