Tax-Exempt Charities in Hong Kong
Charities are a good way to give back to the community, and because of this they enjoy certain tax benefits for their good causes.The Hong Kong government grants tax exemption of charitable institutions and trusts of public character (charities). Under section 88 of the Inland Revenue Ordinance (Cap 112), the charity can be exempt from profits tax.
However, there are certain conditions that must be fulfilled for the trade or business of each charity. This is so the IRD ensures that the tax exemption provided to charities is in line with the relevant IRO (Inland Revenue Ordinance) provisions.
What exactly is a Charity?
Before we dive into the tax exemption for charities in Hong Kong, let’s understand what a charity is.
The Charity should be established exclusively for charitable purposes
Under the rules of the Hong Kong government, a ‘charity’ has a specific meaning. It should be established exclusively for charitable purposes. Whether you own an institution or trust in the form of charity, you have to make sure that it is established particularly for bettering society as a whole. As per the law, a charitable purpose is divided into “four principal divisions”.
- Relief of poverty
- Advancement of religion
- Advancement of education
- Any other purpose of charitable nature which is beneficial to the community.
Under the first three types (i.e., poverty, education, and religion), the activities can be carried out in any part of the world. But under the last type, the purpose will only be regarded as charitable if they are giving benefits to the community of Hong Kong.
The charity must be established for the public benefit
The purpose of a charity will not be considered as charitable until it is directed to the benefit of the public or a sufficient section of it. Generally, an institution or trust can’t fall within this category of a charity if the entity is established for the benefit of specific individuals.
Even though it may not be possible to give a precise definition of what constitutes a particular section of the public, every case has its own merits. According to the general rule, the benefits of charity should not be explained by a personal connection like a common employer or family relationship.
Charity vs. Non-Profit Organization
Many people still find difficulties telling the difference between these too. Often times they consider them one in the same, which is not entirely true. A charity is not equivalent to a “Non-Profit-Making Organization”.
A non-profit-making organization, including “Non-Governmental Organization (NGO)”, “Voluntary” organizations and trusts are not automatically considered as a charity. But in order to operate as a “Charity”, you need to make sure that it is “Non-Profit Making”.
Irrespective of the purpose of the “non-profit-making” company to operate as a qualified charitable organization, it should be registered with the Hong Kong government. It should also be listed in charitable donations and tax-exempt charities of Hong Kong. The Inland Revenue Department provides profit tax exemption to only qualified “Charity” organizations.
What are the common types of charities?
The most common types of structures for charities are:
- A company incorporated under the Companies Ordinance (Cap 622) (usually a company limited by guarantee)
- A trust
- A society established under the Societies Ordinance (Cap 151)
Before incorporating a charitable organization in Hong Kong, every business owner needs to make sure that they are establishing the organization by a written governing instrument. The government instrument establishing the trust or institution must state the objective or purpose clearly for which the institution is established.
Company Limited by Guarantee for non-profit and charity organizations
In Hong Kong, most charities and non-profit organizations prefer to incorporate their company as limited by guarantee. The main reason to form this type of company is to protect the charity from possible liabilities and remove the roles of shareholders of a company.
The first benefit of a company limited by guarantee is that it doesn’t involve share capital. Due to this, this type of business structure doesn’t have shareholders. The company’s controlling members are not allowed to share the profits of the company. And the profits retained within the company.
The second reason for incorporating charitable organization as a company limited by guarantee is the liability of the members. In fact, the liability of the members is restricted to the amount in which members have contributed to the assets of the company. This amount can be as small as HK$10 or as high as HK$1,000,000, for example. In general, a company limited by guarantee is established for either religion, relief of poverty, environmental protection, trust and foundation, betterment for the community, and others.
The registration process of “company limited by guarantee” is relatively straightforward. It follows the usual steps of the registration of “company limited by shares” (the most common type of business entity for business in Hong Kong). However there are stricter annual reporting for the company’s NAR1 and Audit report, so it’s better to do some research beforehand!
Tax Exemptions for Charity
Trusts of a public character and charitable institutions may be granted for tax exemption under section 88 of the Inland Revenue Ordinance. The individuals and business donors may apply to the Inland Revenue Department (IRD) in order to get recognition as tax-exempt charities.
But the IRD is not responsible for the registration of the charities. In the IRO of Hong Kong, there is no provision that exempts a non-profit-making organization from taxes; this is because not all organizations fall within the category of a charity.
In order to claim tax exemption for charities in Hong Kong under Section 88, business owners have to establish the charity solely for charitable purposes as per the law.
Business and individual donors giving money to these charities can also claim a tax deduction from their overall salaries tax.The deduction can be aggregated to the approved charitable donation up to 35% of the assessable income or may be based on the basis period of the year of assessment. Such aggregate must not be less than $100 (as per the sections 16D and 26C of the Inland Revenue Ordinance).
Tax exemption requirements under Section 88 of IRO
Section 88 of the IRO outlines the requirements for tax-exempt charities in Hong Kong. If these requirements are fulfilled, then the assessable taxable income of the company will be completely exempt from profits tax, after the IRD’s review of the company’s Audit Report.
The general tax exemption contained in section 88 is subject to three main conditions. ALL three conditions must be fulfilled for the company to successfully be qualified as a tax-exempt charity. These conditions are:
a) Profits are applied solely for charitable purposes; and
b) Profits are not expended substantially outside Hong Kong; and
c) (i) the trade or business is exercised in the course of the actual carrying out of the expressed objects of the charity(For example a religious body might sell religious goods); or
(ii) the work in connection with the trade or business is mainly carried on by persons for whose benefit such charity is established (For example, a society for the protection of the blind may arrange for the sale of handicraft work made by the blind)
For example, a charity helping to address environmental issues in Hong Kong which organizes monthly baking sales to raise funds for the charity may fail to meet all three conditions. Even though the money raised is used for charitable purposes, these sales of goods would not fulfil condition C as carrying out the expressed object of the charity nor for persons who benefits such charity is established.
If you have questions or need more information on these conditions for tax-exempt status under section 88, Startupr can help. Contact us today!
In order to claim the tax exemption for charities in Hong Kong, the organization needs to submit an application letter to the IRD. The application should be attached with the following documents-
- A certified copy or a draft of the governing instrument and the rules governing its activities.
- A copy of the relevant certificate of incorporation and other company documents
- A list of activities that have been carried out in the past 12 months
- A list of activities planned for the next 12 months
- A copy of the Audit Report for the last financial year (if applicable).
The business owners have to send the application to the IRD (Inland Revenue Department). It should also include the information related to the governing instrument of the charity which they are following. Generally, within 8-12 weeks of receiving the receipt of the application, if all the requirements are met, the tax exemption would be granted.
Otherwise, the time for getting the exemptions from tax while running the charities in Hong Kong would depend on when the organization could provide all the required information and fulfill the requirements for the tax-exempt status.
Review of tax exemption charities
The Inland Revenue Department of Hong Kong will review the status of the application for tax exemption of charities from time to time in order to ensure the stability of the requirements for charities in Hong Kong.
They will also check whether the activities of charity are compatible with their objectives. Therefore, for review purposes, the charities have to offer their accounts (audited if incorporated), annual reports, and documents, such as a list of activities carried out during the review period.
Some common questions the IRD may ask of the accounts are:
- Breakdown of the company’s income and certain expense accounts.
- Details of the charity’s sales activities and how these fulfill the charity’s purpose.
- Breakdown of the donors of the company.
- Any transactions with related parties.
- If the company has any loans or borrowings from others.
In their review, the IRD may also ask for supporting documents and other evidence to show the provided answers by the company. This is the reason why planning at the initial stages and during your annual Audit is crucial, and these details will be scrutinized later by the IRD.
How can Startupr Help you?
After reading this article, you may have a better understanding of tax exemption under section 88 of the IRO. However, if you want more information related to tax-exempt charities in Hong Kong, then head over Startupr.
We can help people looking to start a charity, set up a bank account, information for tax exempt status or other company filings. Be sure to be organized and have a clear picture on the purposes of setting up your charity. For more information, contact us today!