Taxation of charities

Alice Leung and Soraia Almeida

A look at the IRD’s revised tax guide for charitable institutions

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Alice Leung and Soraia Almeida


On 21 April 2020, the Hong Kong Inland Revenue Department (IRD) published a revised version of its Tax Guide for Charitable Institutions and Trusts of a Public Character, addressing various key issues concerning taxation of charitable institutions. 

This is an evolving area of tax law in Hong Kong as the importance of the work done by charitable institutions is increasing. It is, therefore, crucial for taxpayers in the sector to understand the basis on which they will be taxed. The revised tax guide provides practical guidance on the IRD’s views in respect of assessing taxable profits derived by charitable institutions as well as on specified requirements to qualify for the tax exemption provided under Section 88 of the Inland Revenue Ordinance (IRO).


Section 88 of the IRO provides that approved charitable institutions are exempt from profits tax (as well as stamp duty and business registration fee) where certain conditions are met. While a charity can seek to obtain such a tax exempt status from the department, the IRD is not empowered to register or govern charities. The charity status is important in practice not only because of the tax exemption position, but for the ability to accept donations, which may be deductible for tax purposes by the donors if certain conditions are met.

Section 88 does not contain a clear definition of what charitable purposes are, with the IRD using the well-known “four heads of charity” to characterize charitable purposes. These were derived from an 1891 United Kingdom House of Lords decision, while there are more recent court cases and actions in the U.K., where the Charity Commission (a governance body regulating charities) has evolved the definition of “charitable purposes.”

In addition to those traditional charities such as hospitals, youth organizations, schools, religious bodies, etc. there is an increasing number of charities being established in Hong Kong, as the community is willing to give support to the underprivileged groups. There are also charities or foundations established by corporate groups as part of their corporate social responsibility initiatives. As the IRD is not empowered to regulate charities, the revisions have not focused on providing guidance on what are “charitable purposes.” The IRD has, instead, attempted to provide more clarity on the tax exemption status in the revised guide.


The IRD has recently updated the guidelines twice, firstly in connection with the tax exemption available to charities in September 2019, and secondly by providing more examples to clarify their position in April 2020. The key highlights from the revised guide are summarized below.

Carrying on a business 

The guide confirms that a charity “carrying on a trade or business” in Hong Kong should generally be chargeable to profits tax, unless it can fulfil specified conditions under Section 88 of the IRO.

Regarding the question of whether a charity is “carrying on business” in Hong Kong, the IRD provides that while the totality of facts would be considered, the key to determining whether the activities carried on by a charitable institution amount to the “carrying on of a business” are: (i) the intention of carrying on a business; (ii) the nature of the activities performed, particularly whether they have a profit-making purpose; (iii) whether such activities are repeated and regular or organized in a business-like manner (i.e. including the keeping of books, records and the use of a system); (iv) the size and scale of the institution’s activities including the amount of capital employed in them; and (v) whether the activities are better described as a hobby, or recreational activities.

Exemptions from profits tax 

The guide reiterates that a charity can be exempt from profits tax in respect of the profits from a trade that contributes directly to an expressed object of the charity (i.e. a primary purpose of the trade/business) and/or a trade ancillary to the primary purpose trade that contributes indirectly to successful furtherance of the expressed object (i.e. an ancillary trade/business). The revised guide also considerably expands the list of example activities that may be exempted from profits tax.

The guide also includes some relevant comments regarding charges by charitable institutions for services provided or usage of facilities. Specifically, the IRD confirms that if a charge is imposed on the provision of services or usage of facilities by a charitable institution, the said charge must fulfill the purpose of public benefit, such as non-exclusion from the poor or sufficient provision must be made for the poor to benefit in order for income earned to qualify for exemption under Section 88.

Financial investments 

The guide further elaborates on financial investments made by charitable institutions. Specifically, it clarifies that if a charity invests by way of a discretionary account and the investment manager will act as the agent of the charity, the determination of whether the investments made by the investment manager on behalf of the charity are of capital or revenue nature is a question of fact and degree, which should take into account all the surrounding circumstances, including the investment mandate or pre-defined model portfolio and that the “badges of trade” should remain relevant for answering the question.

The revised tax guide establishes that if such financial investments directly further the charity’s objects and generate financial returns, such returns may not be chargeable to profits tax. Specifically, it confirms that the following income, gains or profits are exempted from profits tax:

  • Dividends received from a corporation which is subject to Hong Kong profits tax;
  • Interest on, and any profit made in respect of a bond issued under the Loans Ordinance or the Loans (Government Bonds) Ordinance, or in respect of an Exchange Fund debt instrument or in respect of a Hong Kong dollar-denominated multilateral agency debt instrument;
  • Interest, profits or gains from qualifying debt instruments (issued on or after 1 April 2018);
  • Interest that is derived from any deposit placed in Hong Kong with an authorized institution, excluding interest received by or accrued to a financial institution;
  • Interest on and any profit made in respect of renminbi sovereign bonds and non-renminbi sovereign bonds; and
  • Interest on and any profit made in respect of debt instruments issued in Hong Kong by the People’s Bank of China.

Rental income 

In respect to a charity leasing out its properties to earn rental income, which would be applied for charitable purposes, the revised guide provides guidance on whether such activities amount to the carrying on of a business and if the respective rental income should be subject to profits tax.

The guide clarifies that if the property letting is not carried out in the course of the actual carrying out of the charity’s expressed objects, the rental income earned should be chargeable to profits tax. On the other hand, if the property letting is exercised in the course of the actual carrying out of the charity’s expressed objects and the rental income is used solely for charitable purposes and not expended substantially outside Hong Kong, the rental income should not be chargeable to profits tax. This has notably wide implications to charities in Hong Kong, as it is fairly common that founders of charities would contribute immovable properties to charities as seed money for generating a sustainable income stream to support the ongoing operations of the charities.

The IRD has expanded the scope of property letting by charitable institutions to cover letting out of properties to other charities, which chargeability to profits tax of the respective rental income may be subject to the aforementioned considerations.

Tax obligations 

With regards to tax obligations applicable to charity institutions, the revised tax guide establishes that if the institution fails to comply with the IRO including informing the IRD about its chargeability to tax, the commissioner of the IRD may compound the relevant offence under Section 80(2) (i.e. accept a monetary settlement instead of sanctioning the institution of a prosecution) and may also impose additional tax under Section 82A of the IRO. Approved charitable institutions should be mindful of their reporting obligations, and the consequences of non-compliance.

Finally, it is worth noting that the revised tax guide reminds charities that, as an employer, they are required to report details of remuneration made to their employees for each year of assessment, commencement and cessation of employment and departure from Hong Kong similar to the general salaries tax obligations applicable to companies in Hong Kong. This is not a new reporting obligation, but an important point for charities to ensure compliance with the IRO.


An update to the tax guide for charitable institutions is an undoubtedly welcome move in view of providing clarity to charities’ obligations under the IRO, where a lot of charities are operating under a simple structure that may not have appropriate resources that are familiar with tax matters.

The fact that this revision to the tax guide has come only a few months after the last revision is quite rare. Yet, this indicates that the IRD is committed to providing further clarity and to enhance certainty in matters concerning the taxation of charitable institutions and their business activities in Hong Kong. The IRD’s clarified views on what income is exempt from tax will surely have an impact on charities’ financial capability of deploying resources for charitable purposes. Failure to comply with the tax and reporting obligations may potentially bring significant implications on an organization’s reputation, and may jeopardize the charitable organization’s status.

Charities should consider seeking professional assistance to assess and review their current tax position in face of the new guidelines issued by the IRD and consider whether a restructuring is needed.

This article is co-authored by Alice Leung, Corporate Tax Advisory Partner, and Soraia Almeida, Corporate Tax Advisory Senior Manager, of KPMG China.

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