9. If not every receipt/income from my business is taxable, which is taxable and which is not?

9. If not every receipt/income from my business is taxable, which is taxable and which is not?

General Rule

Receipts arising from day-to-day business operations are normally your operating income and are taxable.

Proceeds from the sales of fixed /capital assets are capital receipts and are usually non-taxable.

Income closely connected with your business operations is also taxable, including:

• rental income received from sub-letting part of your business premises;
• rebates received from trade associates; and
• the forfeiture of trade deposits or compensation money from customers arising from the cancellation of ordinary business contracts.

Sale proceeds arising from the sale of your business entity as a going concern or of your fixed assets are normally of capital nature and are non-taxable. You should however keep in mind the specific provisions in the Inland Revenue Ordinance which relate to the treatment of stock and machinery and plant under such circumstances (seek advice from a practicing lawyer or accountant if required).

Dividends received from a corporation which is subject to Profits Tax are generally excluded from the assessable profits of the recipient.

Examples of taxable income/receipts:

• trade debts that were claimed irrecoverable, and deducted from the previous years' assessable profits, but which have subsequently been recovered from customers;
• grants and subsidies (unrelated to capital expenditures) you received from the Government or other parties;
• rental/charges for the hiring of your computers, equipment and machines;
• sums received for the transfer of a right to receive income.
• sum recovered from an insurance policy for loss of trading stock; and

Under the Inland Revenue Ordinance, there are also certain sums that are deemed to be receipts arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong, which include:

• sums received from the exhibition or use in Hong Kong of cinematography or television film or tape, sound recording or their connected advertising materials;
• sums for the use or right to use in Hong Kong of a patent, design, trademark, copyright material or a secret process/formula etc.; and
• sums received for the use, or the right to the use, outside Hong Kong when such sums are deductible in ascertaining the assessable profits of a person under Profits Tax, of any patent, design, trade mark, copyright material or a secret process or formula etc.

 Examples of non-taxable income/receipts: 

• proceeds from the sale of fixed/capital assets;
• proceeds from the sale of business interests/goodwill;
• compensation for early termination of business tenancies;
• dividends from corporations subject to Profits Tax separately;
• amounts already included in the assessable profits of other persons chargeable to Profits Tax; and
• interest on Tax Reserve Certificates.