Frequently Asked Questions about Deductibility of Interest Expense in Hong Kong-Company Formation_Trademark Registration_Tax Service - Hong Kong CPA

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Taxation - Hong Kong

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Frequently Asked Questions about Deductibility of Interest Expense in Hong Kong

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The following are the frequently asked questions regarding tax deduction for interest expenses in Hong Kong:

Q：

What types of interest expense are eligible as tax deduction?

A：

If the interest expense is incurred in the production of chargeable profits, then it is deductible. However, there are some restrictions under certain circumstances.

Q：

What are those prescribed conditions?

A：

Conditions must be satisfied before interest expenses could be allowed as deductions in computing assessable profits are shown as below:

•	The money has been borrowed by a financial institution [section 16(2)(a)]; or
•	The money has been borrowed by a LAC banking entity by way of issuing a regulatory capital security [section 16(2)(ab)]; or
•	The money has been borrowed by a public utility company at a rate of interest specified by the Financial Secretary [section 16(2)(b)]; or
•	The money has been borrowed from a person other than a financial institution or overseas financial institution and the sums payable will be allowed if the lender is liable to Profits Tax on the interest received [section 16(2)(c)]; or
•	The money has been borrowed from a financial institution or an overseas financial institution [section 16(2)(d)]; or
•	The money has been borrowed wholly and exclusively to finance either
	i.	Capital expenditure incurred by the borrower on the provision of any machinery or plant qualifies for an allowance / any machinery or plant qualified for research and development activities / qualified prescribed fixed assets / any qualified environmental protection machinery or environment-friendly vehicle or
	ii.	The purchase of trading stock by the borrower which is used in the production of chargeable profit
	And the lender is not a connected person of the borrower [section 16(2)(e)].
•	Interest is paid by a corporation on debenture listed in Hong Kong / recognized stock exchange, or instruments marketed in Hong Kong / recognized center, issued by the corporation or its associated corporation. If the debenture or debt instrument is issued by an associated corporation, the proceeds of which is on lent to the borrower, the interest expense allowed as a deduction to the borrower is restricted to the interest expense paid by the associated corporation to the debenture or debt instrument holders [section 16(2)(f)]; or
•	The borrower is a corporation carrying on in Hong Kong an intra-group financing business and:-
	i.	The deduction claimed is in respect of an interest payable by the corporation on money borrowed from a non-Hong Kong associated corporation in the ordinary course of intra-group financing business; and
	ii.	The lender is, in respect of the interest, subject to a similar tax in a territory outside Hong Kong at a rate that is not lower than 16.5% (or 8.25% for a qualifying CTC); and
	iii.	The lender’s right to use and enjoy that interest is not constrained by a contractual or legal obligation to pass that interest to any other person, unless the obligation arises as a result of a transaction between the lender and a person other than the borrower dealing with each other at arm’s length. [section 16(2)(g).

Q：

I am carrying on a business as a plastics manufacturer. In order to obtain additional working capital, I borrowed from a local bank and the borrowing was secured by a mortgage over the factory premises owned by me. Is the interest I paid deductible under this situation?

A：

A loan from a financial institution would satisfy above mentioned section 16(2)(d) if such loan should not secured or guaranteed by a deposit made with that or another financial institution or it was secured or guaranteed against a deposit with that or another financial institution by you/ on your behalf/ your connected person and the interest received on the deposit was chargeable to profits tax in Hong Kong.
In this case, the interest paid is deductible since the loan was not secured by a deposit.

Q：

What if the borrowing was secured by a fixed deposit with the same bank registered in the name of my wife. She does not carry on any business in Hong Kong. Would that make the outcomes difference?

A：

Since the interest received by your wife is not chargeable to profits tax in Hong Kong and your relationship as husband and wife fall within the class of connected person, the interest paid is not deductible.

Q：

Is the interest paid deductible if the borrowing was partly secured by a fixed deposit with the same bank registered in the name of my other wholly-owned company which carried on a business in Hong Kong as well?

A：

Although the borrowing was secured against a deposit owned by a connected person, the interest paid is deductible as the interest on the deposit was chargeable to profits tax in the hands of the other company.

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