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Tax Guide for Charitable Institutions and Trusts of a Public Character Inland Revenue Department the Government of the Hong Kong Special Administrative Region of the People’s Republic of China

TAX GUIDE FOR
CHARITABLE INSTITUTIONS AND TRUSTS
OF A PUBLIC CHARACTER
INLAND REVENUE DEPARTMENT
THE GOVERNMENT OF
THE HONG KONG SPECIAL ADMINISTRATIVE REGION
OF THE PEOPLE’S REPUBLIC OF CHINA
September 2021
Our website: www.ird.gov.hk
TAX GUIDE FOR CHARITABLE INSTITUTIONS AND TRUSTS OF A
PUBLIC CHARACTER
CONTENT
Paragraph
Introduction
The Department’s role 1
The guide 4
Meaning of Charity
Charity is not equivalent to voluntary or non-profit- 5
making organisation
Charity must be established exclusively for charitable 6
purposes
Charitable purposes are classified into four heads 7
Charity must be established for public benefit 10
Charity must act lawfully and has duty to safeguard 12
national security
Constitution of Charity
Governing instrument 16
Clauses in governing instrument 17
Taxation of Charity
Tax exemption 20
Trading or business profits are taxable unless specified 21
conditions are fulfilled
Trade or business not exercised in the course of the 23
actual carrying out of expressed objects
Trading or carrying on business 24
Badges of trade 26
Indicia of carrying on business 27
Trading or non-trading transactions 29
Primary purpose trade/business or ancillary 32
trade/business
Trades/businesses where work mainly carried out by 35
beneficiaries
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Charging for services – public benefit 36
Investee trading company not tax exempt 39
Financial investment 40
Programme related investment 44
Property letting 46
Charities subject to Hong Kong’s Jurisdiction
Charities qualify for tax exemption 50
Other Tax Advantages
Inland Revenue Ordinance (Cap 112) 51
Stamp Duty Ordinance (Cap 117) 52
Business Registration Ordinance (Cap 310) 53
Approved Charitable Donations
Definition of approved charitable donation 54
Donation receipts 58
To Check Whether an Organisation is a Tax-Exempt
Charity
List of tax-exempt charities 60
The Way a Charity is Recognised as a Tax-Exempt
Charity
Procedure 61
Review of Tax Exemption and Tax Obligations
Duty to submit accounts and annual reports 65
Duty to inform change in circumstances 68
Duty to inform chargeability to tax 71
Duty to report remuneration paid to employees 74
Other Useful References
Fund raising and anti-terrorist financing 75
Appendices
1 Purposes Held to be Charitable Purposes by the Courts
2 Clauses Generally Contained in a Charity’s Governing Instrument
3 Clauses Generally Not Acceptable in a Charity’s Governing Instrument
TAX GUIDE FOR CHARITABLE INSTITUTIONS AND TRUSTS OF A PUBLIC
CHARACTER
INTRODUCTION
The Department’s role
1. Exemption of charitable institutions and trusts of a public character (i.e.
charities) from tax is granted by the legislature. Section 88 of the Inland
Revenue Ordinance (Cap 112) (the IRO) provides that a charity is exempt
from profits tax subject to certain conditions to be fulfilled in relation to the
trade or business carried on by the charity concerned. The Department’s
role is to ensure that tax exemption is provided to a charity as per the
relevant IRO provisions. A charity may request the Department to
recognise its tax exemption status accorded by section 88 of the IRO (i.e.
tax-exempt charity).
2. The Department is not responsible for the registration of charities nor does
the Department have the statutory powers in the monitoring of their
conducts. To facilitate the general public to check whether donations to
an organisation will be accepted as approved charitable donations for the
purposes of the IRO, the Department, with the consent of the
organisations concerned, publishes a list of charities that are exempt from
tax under section 88 of the IRO, as explained in paragraph 60. It must
be emphasised that the list does not constitute a formal register of
charities. It should be apparent that the list does not include:
(a) charities which do not seek for the recognition of status under section
88 of the IRO (e.g. charities which do not require such recognition as
they do not need to raise donations from the public); and
(b) charities which do not give consent to the Department for publishing
their names.
The Department’s work strictly does not include the giving of advice
regarding the setting up or running of charities. Legal advice, if required,
should be sought from legal practitioners.
3. Section 88 of the IRO does not provide a legislative framework for
regulating and monitoring charities’ operations or governance. The
provisions therein primarily concern the exemption of tax liability of
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charities. Where the Department considers, after taking a holistic view,
that a charity’s contravention of its charitable objects (e.g. use of funds
not in furtherance of the charity’s charitable objects, serious breach of the
charity’s governing instrument, and engaging in or supporting any acts or
activities which are unlawful or contrary to the interests of national security)
would fundamentally change its charitable status, the Department may
withdraw the recognition of tax exemption status of the charity concerned
and raise tax assessment where appropriate.
The guide
4. This tax guide contains the interpretation and practice of the Department
in relation to the taxation of charitable institutions or trusts of a public
character and other related matters. It has no binding force and does not
affect a person’s right of objection or appeal to the Commissioner of Inland
Revenue, the Board of Review or the Court.
MEANING OF CHARITY
Charity is not equivalent to voluntary or non-profit-making organisation
5. A voluntary or so-called non-profit-making organisation is not necessarily
a charity, however worthy its causes may be. In fact, there is no provision
in the IRO which exempts a voluntary or non-profit-making organisation
from tax.
Charity must be established exclusively for charitable purposes
6. The law of charity in Hong Kong has been built up by case law. To be a
charity at law, the institution or trust must be established for purposes
which are exclusively charitable and these purposes of the organisation
are charitable in the strict legal sense.
Charitable purposes are classified into four heads
7. It has long been the practice of the courts in Hong Kong to refer to the
Preamble to the Charitable Uses Act 1601 (commonly referred to as “the
Statute of Elizabeth I”) for guidance. The leading common law authority
on the definition of charity, which is expressly applied by the courts in
Hong Kong, is the famous dictum of Lord Macnaghten in the case of
Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC
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531. In that case, Lord Macnaghten listed “four principal divisions” of
charitable purposes:
(a) the relief of poverty;
(b) the advancement of education;
(c) the advancement of religion; and
(d) other purposes of a charitable nature beneficial to the community not
falling under any of the preceding heads.
8. While the purposes under the first three heads (i.e. poverty, education and
religion) may be in relation to activities carried on in any part of the world,
those under head (d) will only be regarded as charitable if they are of
benefit to the Hong Kong community. Examples of purposes held by the
courts to be charitable are given in the list shown at Appendix 1.
9. The courts have considered various situations where charity status was
claimed. Purposes held not to be charitable purposes include:
(a) attainment of a political object (such as furthering the interests of a
particular political party, procuring changes in laws and procuring a
reversal of government policy or of particular decisions of
governmental authorities);
(b) promotion of the benefits of the founders or subscribers;
(c) encouragement of a particular sport such as football or cycling;
(d) provision of a playing field, recreation ground or scholarship fund for
employees of a particular company.
Charity must be established for public benefit
10. A purpose is not charitable unless it is for public benefit. The Department
agrees with the interpretation of the Charity Commission of the UK that
the public benefit requirement has two aspects: (a) the benefit aspect; and
(b) the public aspect. The important points to consider when deciding
whether an institution or trust’s purposes meet the two aspects are set out
in the following table:
Public Benefit Important Points to Consider Requirement
Benefit aspect There must be an identifiable benefit or benefits:
(a) it must be clear what the benefits are;
(b) the benefits must be related to the purposes;
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(c) benefits must be balanced against any detriment or
harm.
Public aspect The benefit must be to the public in general, or to a
sufficient section of the public:
(a) the beneficiaries must be appropriate to the
purposes;
(b) where the benefit is to a section of the public, the
opportunity to benefit must not be unreasonably
restricted by geographical or other restrictions;
(c) any personal benefit (i.e. benefits that a person or
organisation receives from a charity other than as a
beneficiary) must be incidental.
11. An institution or trust cannot generally be charitable if it is in principle
established for the benefit of specific individuals. It is, however, not
possible to lay down any precise definition of what constitutes a sufficient
section of the public. Each case must be considered on its own merit.
As a general rule, the beneficiaries of a charity must not be defined by a
personal connection like family relationship or common employer, as
explained in Re Compton [1945] Ch 123 and Oppenheim v Tobacco
Securities Trust Co Ltd [1951] AC 297.
Charity must act lawfully and has duty to safeguard national security
12. A charity’s resources must be directed towards charitable works and
should not engage in or support any acts or activities which are unlawful
or contrary to the interests of national security.

13. Article 6 of the Law of the People’s Republic of China on Safeguarding
National Security in the Hong Kong Special Administrative Region (the
NSL) clearly provides that any institution, organisation or individual in the
Hong Kong Special Administrative Region (the HKSAR) shall abide by the
NSL, and the laws of the HKSAR in relation to the safeguarding of national
security, and shall not engage in any act or activity which endangers
national security.
14. Article 3 of the NSL provides that it is the duty of the HKSAR under the
Constitution of the People’s Republic of China to safeguard national
security and the HKSAR shall perform the duty accordingly.
15. Thus, a charity which takes part in acts or activities which are unlawful or
contrary to the interests of national security, or uses its resources to
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support or promote such acts or activities, will not be regarded as a
genuine charity.
CONSTITUTION OF CHARITY
Governing instrument
16. It is essential that a charity is established by a written governing
instrument. The type of instrument adopted would depend on the
particular circumstances of the charity proposed and the preference of the
promoters or founders. Persons who are considering starting a charity
are strongly advised to seek legal advice about the format, content and
legal sufficiency of the charity’s governing instrument. Before seeking
advice, persons founding a charity must take cognisance of the purposes
of the charity and the manner in which they wish the charity to be
administered. Briefly, the types of structures are:
(a) a trust;
(b) a society registered under the Societies Ordinance (Cap 151);
(c) a company incorporated under the Companies Ordinance (Cap 622);
and
(d) a statutory body incorporated under a specific Ordinance.
The instrument establishing the institution or trust must precisely and
clearly state the purposes or objects for which the institution or trust is
established. Apparently, a charity incorporated as companies limited by
guarantee under the Companies Ordinance (Cap 622) will increase the
public’s confidence about its operations. Currently, the majority of
institutions which are recognised by the Department as tax-exempt
charities are companies limited by guarantee.
Clauses in governing instrument
17. Generally, the clauses in the governing instrument of a charity include:
(a) clause stating precisely and clearly its objects for which the charity
is established;
(b) clause limiting the application of its funds towards the attainment of
its stated objects;
(c) clause prohibiting distribution of its incomes and properties amongst
its members;
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(d) clause prohibiting members of its governing body (e.g. directors,
members of the executive committee, trustees, etc.) from receiving
remuneration;
(e) clause requiring members of its governing body (e.g. directors,
members of the executive committee, trustees, etc.) to disclose
material interest and not to vote in respect of a transaction,
arrangement or contract in which they are so interested;
(f) clause specifying how the assets should be dealt with upon its
dissolution (e.g. the remaining assets should normally be donated to
other charities); and
(g) clause requiring the keeping of sufficient records of income and
expenditure (including donation receipts), proper accounting books
and compilation of annual financial statements.
18. Examples of clauses (b) to (g), as referred in paragraph 17 above, that
the governing instrument of a charity should generally contain are at
Appendix 2 whilst clauses not acceptable are at Appendix 3.
19. If a charity can show that the payment of allowance or remuneration to its
member(s) of governing body is necessary and reasonable in the
exceptional circumstances, the requirement referred in paragraph 17(d)
above can be relaxed, provided that the following conditions are satisfied
and specified in the charity’s governing instrument:
(a) the remunerated members of governing body have special
qualifications which are not otherwise available to the charity and
which would make for its more effective administration;
(b) the remunerated members of governing body are absent from
meetings and discussions concerning their own appointment,
conditions of services and remuneration and must not vote thereon;
and
(c) the number of such remunerated members must be less than majority
of quorum (of meetings of the governing body).
TAXATION OF CHARITY
Tax exemption
20. A charity is exempt from tax under section 88 of the IRO. The general tax
exemption contained in section 88 is subject to conditions (see paragraph
22 below) and a charity subject to tax would continue to be a charity.
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Trading or business profits are taxable unless specified conditions are
fulfilled
21. Section 14 of the IRO provides that profits tax shall be charged for each
year of assessment on every person carrying on a trade, profession or
business in Hong Kong in respect of his assessable profits arising in or
derived from Hong Kong for that year from such trade, profession or
business (excluding profits arising from the sale of capital assets). Prima
facie, all profits derived in Hong Kong from trading or business activities
are subject to profits tax. Therefore, a charity carrying on a trade or
business is therefore chargeable to profits tax unless the charity can fulfil
specified conditions under section 88 of the IRO.
22. Proviso to section 88 of the IRO provides that if a charity carries on a trade
or business, the profits from such trade or business are exempt from
profits tax only if:
(a) the profits are applied solely for charitable purposes; and
(b) the profits are not expended substantially outside Hong Kong; and
(c) either –
(i) the trade or business is exercised in the course of the actual
carrying out of the expressed objects of the charity; or
(ii) the work in connection with the trade or business is mainly
carried on by persons for whose benefit such charity is
established.
Trade or business not exercised in the course of the actual carrying out
of expressed objects
23. If a charity derives profits from a trade or business, it must establish that
all the requirements of the proviso to section 88 of the IRO are satisfied
before the profits could be exempt from profits tax. In Church Body of
the Hong Kong Sheng Kung Hui v CIR [2010] 2 HKC 475, the Court of
First Instance took the view that the property development transaction
could not be said to be exercised in the course of the actual carrying out
of the object of the church and the profit accrued to the church from the
transaction in question was held not exempt from profits tax.
Trading or carrying on business
24. Under section 2 of the IRO, “trade” is defined to include “every trade and
manufacture, and every adventure and concern in the nature of trade”,
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and “business” is defined to include “agricultural undertaking, poultry and
pig rearing and the letting or sub-letting by any corporation to any person
of any premises or portion thereof, and the sub-letting by any other person
of any premises or portion of any premises held by him under a lease or
tenancy other than from the Government”.
25. The definitions of “trade” and “business” in the IRO are not exhaustive. It
is well-established that whether a person is carrying on a trade or business
depends on the facts of the particular case. It is essentially a question of
fact and degree.
Badges of trade
26. Whether the sale of goods and services by a charity is “trading” depends
on a number of factors, including:
(a) the number and frequency of transactions;
(b) the nature of the goods or services being sold;
(c) the intention of the charity in acquiring the goods which are to be
sold;
(d) whether the goods are capable of being used and enjoyed by the
charity selling them;
(e) the nature and mechanics of the sales; and
(f) the presence or absence of a profit motive.
But the fact that the sale of goods, services and property furthers the
objects of the charity, or that the trading profits are to be used for the
furtherance of those objects, does not prevent an activity from being
regarded as “trading”.
Indicia of carrying on business
27. While it may be not possible to definitively state what amounts to a
business, it was however observed in Federal Commissioner of Taxation
v Murry 39 ATR129 that a business is a course of conduct carried on for
the purpose of profit and involves notions of continuity and repetition of
actions.
28. While the totality of facts would be considered, the key indicia in
determining whether the activities carried on by an organisation amount
to the carrying on of a business are:
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(a) whether the organisation intends to carry on a business;
(b) the nature of the activities, particularly whether they have a profitmaking purpose;
(c) whether the activities are:
(i) repeated and regular;
(ii) organised in a business-like manner, including the keeping of
books, records and the use of a system;
(d) the size and scale of the organisation’s activities including the
amount of capital employed in them; and
(e) whether the activities are better described as a hobby, or recreation.
Trading or non-trading transactions
29. The following transactions are not generally regarded as “trading”, and the
profits derived from such transactions are not regarded as trading profits:
(a) the sale of goods donated to a charity for the purpose of sale;
(b) the sale of capital investments; and
(c) the sale of capital assets which the charity uses, or has used, for its
charitable purposes.
30. Where a charity is trading, the trading profits are, in principle, subject to
profits tax, other than as specifically exempted under the proviso to
section 88.
31. The mere sale by a charity of goods donated to it is generally not regarded
as “trading” for tax purposes. For the charity the sale proceeds are
simply a realisation of the value of a gift. If the goods donated to a charity
are substantially altered or improved which brings them into a different
condition for sale purposes, for example by turning donated raw materials
into finished and saleable goods, the profits arising from such sales may
be treated as trading profits. However, sorting and cleaning items, or
giving the donated goods minor repairs, does not turn the profits obtained
from their sales trading profits.
Primary purpose trade/business or ancillary trade/business
32. Subject to other conditions of the proviso to section 88 of the IRO to be
fulfilled, a charity can conduct and be exempted from profits tax in respect
of the profits from a trade/business which contributes directly to an
expressed object of the charity (i.e. a primary purpose trade/business)
and/or a trade/business ancillary to the primary purpose trade/business
– 10 –
which contributes indirectly to successful furtherance of the expressed
object (i.e. an ancillary trade/business). In other words, a charity can
conduct not only a trade/business which is ancillary to a primary purpose
trade/business but also a primary purpose trade/business without having
any liability under profits tax.
33. Examples of primary purpose trades/businesses include:
(a) the sale of religious tracts by a religious charity;
(b) the provision of educational services by a charity school or college
in return for course fees;
(c) the holding of an exhibition by an art charity in return for admission
fees;
(d) the sale of tickets for a theatrical production staged by a theatre
charity;
(e) the provision of healthcare services or residential accommodation by
a healthcare charity in return for payment;
(f) the sale of certain educational goods by a museum charity;
(g) the sale of products made of recycled materials by an environmental
protection charity;
(h) the provision of medical consultation by an elderly care and welfare
charity in return for consultation fees;
(i) the provision of training courses to children with special education
needs by a children’s charity in return for course fees;
(j) the provision of extra-curricular activities/ after-school care
programmes/ after-school tutorial classes for school children and
teenagers by a children and young people’s charity in return for fees;
(k) the provision of family counselling services by a family charity to help
dysfunctional families in return for fees;
(l) the provision of low-priced meals to the poor by a poverty charity;
(m) the provision of a residential care home for the elderly by an elderly
care charity in return for fees;
(n) the provision of recreational facilities in return for fees by an elderly
care charity for the elderly; and
(o) the provision of medical or rehabilitation equipment in return for fees
by an elderly charity or medical charity.
34. Examples of ancillary trades/businesses include:
(a) the provision of serviced accommodation to students by a charitable
university or college;
(b) the sale of goods or services for the benefits of students by a
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charitable school or college;
(c) the sale of food, drink and snacks to patrons of an art charity or
museum charity;
(d) the sale of confectionary, toiletries and flowers to patients and their
visitors by a charitable hospital;
(e) the provision of childcare services in a church to parents who attend
church services;
(f) the sale of vegetarian food by a religious charity in a temple (e.g.
Buddhist temple) built for the advancement of religion;
(g) the provision of study tour to children by an education charity; and
(h) the provision of pilgrimage tour to believers by a religious charity.
Trading/carrying on business is not regarded as ancillary to the carrying
out of an expressed object of a charity simply because its purpose is to
raise funds for the charity.
Trades/businesses where work mainly carried out by beneficiaries
35. Subject to other conditions of the proviso to section 88 of the IRO to be
fulfilled, a charity can claim tax exemption on the profits of a
trade/business where the work in connection with the trade/business is
mainly carried out by beneficiaries of the charity. Examples of
trades/businesses carried on by a charity where the work is mainly carried
out by beneficiaries are:
(a) a cafe operated by students as part of a catering course at a further
education college;
(b) a bakery operated by a charity which hires mainly the physically
handicapped for providing on-the-job training to them;
(c) a shop for selling low-cost goods or products (e.g. artworks and
handicrafts) made by persons suffering disability who are the
beneficiaries of a charity for the disabled;
(d) the sale of artwork produced by elderly persons as part of their
rehabilitation by an elderly care and welfare charity;
(e) the operation of a restaurant mainly by the deaf as part of a training
programme run by a hearing loss charity to facilitate the integration
of the deaf into the community; and
(f) the provision of car-beauty services by the ex-mentally ill as part of
an on-the-job training programme run by a rehabilitation charity.
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Charging for services – public benefit
36. A charity may charge for the services or facilities it offers. This is usually
because the charity’s services or facilities are expensive to provide or the
charity will be unable to operate at all unless the charity makes charges.
Examples of charities that often charge for their services include:
(a) charitable educational establishments (e.g. schools, colleges,
universities);
(b) charities that advance education or promote the arts (e.g. theatres,
concert halls, museums, art galleries);
(c) charities that advance health or relieve sickness (e.g. charitable
hospitals);
(d) charities that provide residential care; and
(e) charities that advance heritage or environmental protection or
improvement.
37. If a charity charges for the services or facilities it offers, the charity has to
consider whether the public benefit requirement of charities would be
satisfied. The poor cannot be excluded. In setting the charges for the
services or facilities a charity is to offer, the charity must consider whether
the poor can least afford it. This might depend, for example, on the
nature of the service and the frequency or regularity with which such a
service is likely to be used or needed, and the consequent financial
commitment likely to be required by beneficiaries. However, in general,
it will usually mean charges that someone of modest means will not find
readily affordable. If the charges are of a level that the poor cannot afford,
it must ensure that the poor can benefit.
38. When a charity makes provision for the poor to benefit, the level of
provision must be more than minimal or token. There are no objective
benchmarks for a charity to follow regarding what is more than minimal or
token provision for the poor. This is a matter for the charity to decide,
taking into account all the circumstances of the charity. Examples are:
(a) reduction in charges for people who cannot afford the full cost;
(b) provision of benefit in other ways, such as supporting the delivery of
similar services by another charitable organisation; and
(c) other sources of funding from outside the charity which assist the
poor in accessing the benefits of the charity (e.g. scholarship funds
provided by others).
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Investee trading company not tax exempt
39. Subject to the objects and powers expressly provided in the governing
instrument, a tax-exempt charity may invest in a trading company. The
profits derived by such trading company (i.e. the investee trading
company) do not qualify for tax exemption under section 88 of the IRO.
The trading company is liable to profits tax under section 14 of the IRO in
the usual way (e.g. investee trading company operates a hotel or
restaurant).
Financial investment
40. A charity may invest in order to achieve a financial return so that it can
further the charity’s objects. Normally, such an investment is expected
to be made in a proper and prudent manner to yield best return within
acceptable level of risk. The financial return may be chargeable to profits
tax depending on its nature and the circumstances, including the way in
which the return is applied (i.e. whether solely for its charitable objects)
and the place where the return monies are expended (i.e. whether
substantially in Hong Kong or elsewhere). If a charity purchases an
asset with the intention of selling it for a profit in the course of a trading
venture, it is likely to be considered as trading. The profits derived by a
charity from the sale of a trading asset are subject to profits tax unless the
conditions in the proviso to section 88 of the IRO are satisfied. The
following is an example of financial investment that would not give rise to
profits tax consequence:
A charity invests with surplus fund that is not needed in the short or
medium term in a diversified investment fund designed for long term
investment (i.e. a capital asset). The charity does not engage in trading
of investment fund or financial securities. The financial return so derived
from the investment fund will not be chargeable to profits tax.
41. If a charity invests by way of a discretionary account (i.e. an account that
allows a licensed or registered investment manager to trade in investment
products on behalf of a client without specific authorisation from the client),
the investment manager will act as the agent of the charity. Whether the
investments made by the investment manager on behalf of the charity is
of capital or revenue nature is a question of fact and degree which takes
into account all the surrounding circumstances, including the investment
mandate or pre-defined model portfolio. The “badges of trade” (see
paragraph 26 above) remain relevant for answering the question.
– 14 –
42. Under the IRO, the following income, gains or profits are specifically
exempted from profits tax liability:
(a) dividends received from a corporation which is subject to Hong Kong
profits tax;
(b) interest on, and any profit made in respect of a bond issued under
the Loans Ordinance (Cap 61) or the Loans (Government Bonds)
Ordinance (Cap 64), or in respect of an Exchange Fund debt
instrument or in respect of a Hong Kong dollar-denominated
multilateral agency debt instrument;
(c) interest, profits or gains from qualifying debt instruments (issued on
or after 1 April 2018);
(d) interest that is derived from any deposit placed in Hong Kong with
an authorised institution, excluding interest received by or accrued
to a financial institution;
(e) interest on and any profit made in respect of Renminbi sovereign
bonds and non-Renminbi sovereign bonds; and
(f) interest on and any profit made in respect of debt instruments issued
in Hong Kong by the People’s Bank of China.
43. Where a charity makes a financial investment in companies or entities in
which the members of its governing body have personal interests, full
consideration has to be given as to whether:
(a) the investment is appropriate for the charity and in line with its
investment policy;
(b) any conflict of interest issues have been identified and managed; and
(c) any personal benefit is acceptable in the sense that it is necessary
in the circumstances, reasonable in amount and in the interests of
the charity.
Where there is an unacceptable level of personal benefit and thereby not
fulfilling the public benefit requirement, it can affect the charity’s charitable
status and hence its tax exemption under section 88 of the IRO.
Programme related investment
44. A charity may use assets to directly further the charity’s objects while
potentially also generating a financial return. This kind of programme
related investment made by a charity is different from the financial
investment in paragraph 40 above in that the justification for making the
former investment is to further the charity’s objects. Same as for the
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financial investment, the financial return from the programme related
investment may be chargeable to profits tax depending on its nature and
circumstances. The following is an example of a programme related
investment that would not attract any profits tax liability:
A charity that works to relieve poverty may give a loan to another charity
for helping unemployed people back into work pursuant to the latter’s
expressed objects (i.e. the loan is made for the actual carrying out the
latter’s expressed objects). This will relieve poverty (i.e. wholly in
furtherance of the charity’s objects); be for the public benefit and be
expected to achieve repayment of the loan and a financial return from
interest payments on the loan. In this case, the interest payments on the
loan would not be chargeable to profit tax.
45. Where a charity makes a programme related investment, it has to ensure
that any personal benefit, including interests to other investors, arising
from the investment should be necessary, reasonable and in the interests
of the charity. There should be reasonable and practical ways to exit
from the investment if it is no longer furthering the charitable objects.
Where there is an unacceptable level of personal benefit and thereby not
fulfilling the public benefit requirement, it can affect the charity’s charitable
status and hence its tax exemption under section 88 of the IRO.
Property letting
46. A charity may lease out its properties for rental income, which is
subsequently applied for charitable purposes. While property letting may
amount to a business, the term “business” is clearly defined to include
property letting by any corporation and sub-letting by any person other
than a corporation. In any event, the following are strong indicia of
business:
(a) the number of properties let is substantial and the charity has
engaged some staff to handle tenancies and to deal with the tenants;
(b) additional services or facilities are provided by the charity as landlord
with the properties let; or
(c) letting by a charity in the course of selling properties which
constitutes a trade.
In such situations, rental income derived by a charity from property letting
can only be exempt from profits tax if the proviso to section 88 of the IRO
can be satisfied.
– 16 –
47. Generally, if the property letting is not exercised in the course of the actual
carrying out of expressed objects, the rental income will be chargeable to
profits tax. The following example illustrates such a case:
A charity holds a property and leases it out at market rent without any
specific target group of tenants. The charity, set up for promotion of
religion, carries out direct charitable activities and/or makes grants for its
charitable objects. Such letting is clearly not exercised in the course of
actual carrying out of the charity’s expressed objects despite the fact that
the rental income is applied solely for its charitable objects and is not
expended substantially outside Hong Kong. As such, the rental income
so derived from letting of the property will be chargeable to profits tax.
48. If the property letting is exercised in the course of the actual carrying out
of the charity’s expressed objects and the rental income, solely applied for
charitable purposes, is not expended substantially outside Hong Kong,
the rental income will not be chargeable to profits tax. The following
example illustrates such a case:
A charity set up for the relief of poverty lets out apartment units it owns at
below-market rent to the poor. The rental income so derived is solely
applied in Hong Kong for its charitable activities to relieve the poor. The
letting is clearly exercised in the course of actual carrying out of the
charity’s expressed objects (i.e. for relief of poverty). As such, the rental
income so derived from letting of the property will not be chargeable to
profits tax.
49. A charity may also lease out its properties to other charities for use. If
the rental income so derived, solely applied for charitable purposes, is not
expended substantially outside Hong Kong, the rental income will not be
chargeable to profits tax. The following is an example of such a case:
An environmental protection charity has a function room for holding
activities related to promotion of environmental protection. When the
function room is not reserved for such activities, the charity leases it out
to other charities at a rent for their use. The rental income so derived, if
applied solely for charitable purposes and not expended substantially
outside Hong Kong, will not be assessed to profits tax.
– 17 –
CHARITIES SUBJECT TO HONG KONG’S JURISDICTION
Charities qualify for tax exemption
50. Following the principle in Camille and Henry Dreyfus Foundation Inc v IRC
[1954] Ch 672, tax exemption will only be given to charities subject to the
jurisdiction of the courts in Hong Kong, that is, charities that have been
established in Hong Kong or Hong Kong establishment of overseas
charities such as those deemed to be established in Hong Kong under
section 4 of the Societies Ordinance (Cap 151), or registered under Part
16 of the Companies Ordinance (Cap 622).
OTHER TAX ADVANTAGES
Inland Revenue Ordinance (Cap 112)
51. For the purposes of profits tax, salaries tax and personal assessment,
sections 16D and 26C of the IRO allow, subject to certain conditions, a
deduction for a donation of money made by a taxpayer to a charity which
is exempt from tax under section 88 or to the Government for charitable
purposes (i.e. an approved charitable donation). Please refer to
paragraphs 54 to 59 below for further information of an approved
charitable donation.
Stamp Duty Ordinance (Cap 117)
52. Section 44 of the Stamp Duty Ordinance provides that stamp duty shall
not be chargeable on any conveyance of immovable property under heads
1(1) (ad valorem stamp duty on property transaction), 1(1AA) (special
stamp duty) and 1(1AAB) (buyer’s stamp duty); or any transfer of Hong
Kong stock under head 2(3) (ad valorem stamp duty and fixed duty on
stock transaction) in the First Schedule where the beneficial interest
therein passes by way of gift from the person entitled to that interest, the
registered owner or the transferor, to or on trust for charitable institutions
or trusts of a public character. The instrument in question must be
submitted to the Collector of Stamp Revenue for adjudication under
section 13 of the Ordinance. It is not treated as duly stamped unless it
has been stamped with a particular stamp or by way of a stamp certificate
denoting either that it is not chargeable with stamp duty or that it is duly
stamped.
– 18 –
Business Registration Ordinance (Cap 310)
53. Where charitable, ecclesiastical or educational institutions of a public
character carry on a trade or business, an exemption from the obligation
of business registration will only be granted if the conditions set out in
section 16(1)(a) of the Business Registration Ordinance are satisfied.
These conditions are similar to the conditions set out in the proviso to
section 88 of the IRO as explained in the paragraph 22 above.
APPROVED CHARITABLE DONATIONS
Definition of approved charitable donation
54. Sections 16D and 26C of the IRO allow a deduction for approved
charitable donations made by a person during a year of assessment.
The term “approved charitable donation” is defined in section 2 of the IRO
as a donation of money to:
(a) any charitable institution or trust of a public character that is exempt
from tax under section 88 of the IRO; or
(b) the Government,
for charitable purposes.
55. The basic criteria governing the granting of the deduction are:
(a) the payment must be a donation;
(b) the donation must be a donation of money;
(c) the donation must be made to a tax-exempt charity, or the
Government;
(d) the donation must be for charitable purposes;
(e) the aggregate of the person’s donations (including the donations of
the person’s spouse, not being a spouse living apart from the person)
must not be less than $100;
(f) the allowable deduction in any year cannot exceed 35% of the
person’s assessable income or profits;
(g) a deduction in respect of the same donation cannot be granted to
more than one person; and
(h) a deduction for the donation can only be claimed once under profits
tax, salaries tax or personal assessment.
– 19 –
56. The word “donation”, in its ordinary sense, means a gift. To constitute a
gift, the property transferred must be transferred voluntarily and not as a
result of a contractual obligation to transfer it and no advantage of a
material character is received by the transferor by way of return. In
Sanford Yung-tao Yung v CIR [1979] HKLR 429, it was held that the
purchase of the cinema tickets was an advantage of a material nature
which took the transaction as a whole outside the definition of “donation”.
57. If the person making a payment to a tax-exempt charity received a
material benefit, the whole of the payment falls outside of the ambit of a
gift because the requirement that no material advantage may accrue to
the donor, is breached. Payments other than those which are strictly
gifts are not donations for the purposes of sections 16D and 26C of the
IRO. There is no provision in the IRO to permit payments to be
apportioned into “charitable” and “material benefit” components. For
further information, please refer to Departmental Interpretation and
Practice Notes No. 37 (Revised) – Concessionary Deductions: Section
26C Approved Charitable Donations.
Donation receipts
58. A charity should note that donors may be asked to produce receipts for
donations in support of any claims they make for an allowance under the
IRO. In respect of a donation of money received, a tax-exempt charity
may prepare and issue proper receipt. To assist donors to claim tax
deduction, the donation receipt should show the full name of the taxexempt charity according to its constitutional or formation document.
59. If the donation is not a donation of money, it would not constitute an
approved charitable donation and would not be allowed for tax deduction.
It is therefore important for a charity to distinguish donations from other
payments when issuing such receipts. Payments other than those which
are strictly gifts (e.g. payments made for a grave space, services such as
saying prayers, reservation of a space for ancestral worship, admission
tickets for film shows, etc.) should not be termed as donations. In
borderline cases, the exact nature of the payment should be clearly stated
on the receipt so that such transaction can be separately considered by
the Department.
– 20 –
TO CHECK WHETHER AN ORGANISATION IS A TAX-EXEMPT CHARITY
List of tax-exempt charities
60. To enable members of the public making donations to check whether such
donations qualify for a tax deduction, a list of charitable institutions and
trusts of a public character recognised by the Department as exempt from
tax under section 88 of the IRO is available at the Department’s website.
A tax-exempt charity should inform the Department if there is a change in
its name as soon as possible. Otherwise, donors may not be able to find
its new name from the above list.
THE WAY A CHARITY IS RECOGNISED AS A TAX-EXEMPT CHARITY
Procedure
61. Any organisation wishing to seek recognition as a charity exempt from tax
under section 88 of the IRO should submit the following documents to the
Department:
(a) a letter requesting for recognition of tax exemption status;
(b) if the organisation has been established:
(i) a copy of the relevant certificate of registration;
(ii) a certified true copy of the instrument and rules governing its
activities, i.e. the Articles of Association in the case of a limited
company, the ordinance where the body has been established
by statute, the trust deed in the case of a trust, or the
constitution in the case of a society;
(iii) a list of any activities which have been carried out in the past
12 months (or less, if appropriate), and a list of activities
planned for the next 12 months;
(iv) a list of members of governing body (e.g. directors, trustees,
etc.);
(v) a copy of its accounts for the last financial year (if the
organisation has been established for 18 months or more).
(c) if the organisation has not yet been established:
(i) a draft of the instrument and rules governing its activities;
(ii) a list of the activities planned for the next 12 months from the
date of establishment or date of application, where appropriate;
(iii) a list of founder members/ settlors (for trusts only) and proposed
members of governing body (e.g. directors, trustees, etc.).
– 21 –
62. The request should be sent to the Commissioner of Inland Revenue,
G.P.O. Box 132, Hong Kong.
63. The Department endeavours to respond within 4 months of the date of
receipt of an application for recognition as a charity exempt from tax under
section 88 of the IRO, provided that all relevant information is supplied
with the application and further information from the applicant is not
required.
64. In determining whether an institution or trust is established or carried on
for charitable purposes, the Department will have regard not only to the
stated objects of the institution or trust, but also to the activities which have
been, are being or will be carried out by or in relation to the institution or
trust. If the Department, after a full and detailed consideration of the
circumstances and activities relating to the institution or trust, concludes
that it does not meet the legal test for being a charity as it is not established
for exclusively charitable purposes for public benefit (e.g. engaging in or
supporting acts or activities which are unlawful or contrary to the interests
of national security, or organising activities solely for the benefit of specific
individuals), the institution or trust will not be recognised as a charity
exempt from tax under section 88 of the IRO.
REVIEW OF TAX EXEMPTION AND TAX OBLIGATIONS
Duty to submit accounts and annual reports
65. The Department will, from time to time, call for accounts, annual reports
or other documents to review whether the objects of a tax-exempt charity
are still charitable and if its acts or activities are compatible with its objects
stated in its governing instrument.
66. If there is evidence that (a) the acts or activities of a tax-exempt charity
are unlawful or contrary to the interests of national security, or are
otherwise not compatible with its stated charitable objects; (b) its income
and assets are not wholly applied towards charitable purposes; or (c)
there are any other events having an impact on its tax exemption status,
the Department would request the tax-exempt charity to supply further
information for considering whether it should be continued to be accepted
as a tax-exempt charity.
67. Where the Department considers, after taking a holistic view, that a charity
– 22 –
seriously contravenes its charitable objects (e.g. use of funds not in
furtherance of the charity’s charitable objects, serious breach of the
charity’s governing instrument, or engaging in or supporting acts or
activities which are unlawful or contrary to the interests of national security)
and hence fundamentally changes its charitable status and is not a
genuine charity, the Department may withdraw the recognition of tax
exemption status of the charity concerned and raise tax assessment
where appropriate.
Duty to inform change in circumstances
68. Given a tax-exempt charity is subject to the Department’s review from time
to time, it is essential for a tax-exempt charity to notify the Department
within 1 month of the following circumstances:
(a) change of its correspondence address; or
(b) alteration to its governing instrument; or
(c) termination of its subsidiary body (i.e. a service unit or time limited
project) separately disclosed on the list of tax-exempt charities; or
(d) cessation of its operation, dissolution or winding up.
Failure of notification may lead the Department to cease accepting it as a
tax-exempt charity. For the present purpose, a subsidiary body refers to
a body which is not an entity distinct from the charity and is governed by
the charity’s governing instrument under the charity’s sole ownership and
control.
69. If an organisation has ceased operation or become dormant, it would be
difficult, if not impossible, for the Department to assess whether the
organisation as a matter of fact continues to be a charity and it is not
unreasonable for the Department to consider such cessation or dormancy
when assessing whether the organisation continues to be a charity for the
purpose of section 88. If an organisation was dissolved or wound up,
there is no longer any charity eligible for tax exemption under section 88.
The tax exemption under section 88 would no longer apply to the
organisation.
70. After an organisation’s recognition of tax exemption status has been
revoked or withdrawn, it will be denied the tax exemption under section
88 and tax assessments may be made under the IRO. If the organisation
is aggrieved by the assessments, it may raise objection to the
Commissioner under section 64 and appeal to the Board of Review or the
– 23 –
Court of First Instance against the Commissioner’s determination under
sections 66 and 67 respectively.
Duty to inform chargeability to tax
71. If an organisation:
(a) has ceased to be a charity with chargeable profits which were
previously exempted under the proviso to section 88 of the IRO; or
(b) has commenced to derive chargeable profits, other than profits
which were previously exempted under the proviso to section 88 of
the IRO, whether there is any change in charitable status,
notification must be given in writing to the Department to inform
chargeability to tax for a year of assessment not later than 4 months after
the end of the basis period for that year of assessment.
72. If an organisation fails to inform chargeability to tax, the Commissioner
may “compound” the relevant offence (i.e. accept a monetary settlement
instead of sanctioning the institution of a prosecution) in lieu of penal
action under section 80(2). The Commissioner may also impose
additional tax under section 82A.
73. If additional tax is assessed under section 82A, a notice will be given to
the organisation stating the relevant offence and the organisation is
allowed at least 21 days to make written representations. The
representations received will be taken into account when the
Commissioner determines the amount of additional tax. The
organisation can appeal to the Board of Review against the assessment
to additional tax if it is aggrieved by the assessment.
Duty to report remuneration paid to employees
74. A charity, as an employer, has to report details of remuneration made to
the charity’s employees for each year of assessment. Further, there are
reporting obligations in respect of the charity’s employees in relation to
their commencement of employment, cessation of employment and
departure from Hong Kong. For further information, please refer to the
Department website: Employer’s Obligations.
– 24 –
OTHER USEFUL REFERENCES
Fund raising and anti-terrorist financing
75. It is essential that a charity should maintain good management practice.
The following publications are useful reference:
(a) Good Practice Guide on Charitable Fund-raising issued by the
Social Welfare Department, the Home Affairs Department and the
Food and Environmental Hygiene Department
(b) Best Practice Checklist – Management of Charities and Fund-raising
Activities issued by the Independent Commission Against Corruption
(c) An Advisory Guideline on Preventing the Misuse of Charities for
Terrorist Financing and Appendix issued by the Narcotics Division of
the Security Bureau.
For enquiries, please contact the relevant departments.
TAM Tai-pang
Commissioner of Inland Revenue
September 2021
Our telephone number: 2594 5300
Our website on the Internet: www.ird.gov.hk
Our E-mail address: taxinfo@ird.gov.hk
– 25 –
Appendix 1
Purposes Held to be Charitable Purposes by the Courts
1. Relief of poverty
(a) Relief of poor people
(b) Relief of victims of a particular disaster
2. Advancement of education
(a) Establishment or maintenance of non-profit-making schools
(b) Provision of scholarships
(c) Diffusion of knowledge of particular academic subjects
3. Advancement of religion
(a) Establishment or maintenance of a church
(b) Establishment of religious institutions of a public character
4. Other purposes of a charitable nature beneficial to the community not
falling under any of the preceding heads
(a) Relief of sickness
(b) Relief of physically and mentally disabled
(c) Prevention of cruelty to animals
(d) Protection and safeguarding of the environment or countryside
(e) Promotion of health
– 26 –
Appendix 2
Clauses Generally Contained in a Charity’s Governing Instrument
1. Clause limiting the application of its funds towards the attainment of its
stated objects
Example
The income and property of [the Charity], however derived, shall be
applied solely towards the promotion of the objects of [the Charity] as set
out in this [type of the Charity’s governing instrument].
2. Clause prohibiting distribution of its incomes and properties amongst its
members
Example
None of the income and property of [the Charity] shall be paid or
transferred directly or indirectly, by way of dividend, bonus, or otherwise
howsoever to any member of [the Charity].
3. Clause prohibiting members of its governing body from receiving
remuneration
Example
No member of the [Board of Directors / Executive Committee] or Governing
Body of [the Charity] shall be appointed to any salaried office of [the
Charity], or any office of [the Charity] paid by fees and no remuneration or
other benefit in money or money’s worth shall be given by [the Charity] to
any member of the [Board of Directors / Executive Committee] or
Governing Body.
4. Clause requiring the members of its governing body to disclose material
interest and not to vote in respect of a transaction, arrangement or contract
in which they are so interested
Example
If a [director / member of the Executive Committee] is in any way (directly
or indirectly) interested in a transaction, arrangement or contract or a
proposed transaction, arrangement or contract with [the Charity] that is
significant in relation to [the Charity]’s operations and his interest is
– 27 –
material, he must declare the nature and extent of his interest to the other
[directors / members of the Executive Committee]. The [director /
member of the Executive Committee] must neither vote nor be counted for
quorum purposes in respect of the transaction, arrangement or contract or
the proposed transaction, arrangement or contract in which he is so
interested, and if he does so vote his vote must not be counted.
[Note: Companies incorporated by guarantee may adopt Article 15
Conflicts of interest contained in Schedule 3 Model Articles for Companies
Limited by Guarantee to the Companies (Model Articles) Notice (Cap
622H).] 5. Clause specifying how the remaining assets should be dealt with upon
dissolution
Example
If upon the [winding up / dissolution] of [the Charity] there remains, after
the satisfaction of all its debts and liabilities, any property whatsoever, this
shall not be paid to or distributed among the members of [the Charity]; but
shall be given or transferred to some other institution or institutions, having
objects similar to the objects of [the Charity], and which shall prohibit the
distribution of its or their income and property amongst its or their members
to an extent at least as great as is imposed on [the Charity] under or by
virtue of [Article N] above and this article, such institution or institutions to
be determined by the members of [the Charity] at or before the time of
dissolution and in default thereof by a Judge of the High Court of the Hong
Kong Special Administrative Region having jurisdiction in regard to
charitable funds and, if this provision cannot be effected, then to some
charitable object.
Note: [Article N] is the article in the governing instrument prohibiting distribution
of its incomes and properties amongst its members.
6. Clause requiring the keeping of sufficient records of income and
expenditure (including donation receipts), proper accounting books and
compilation of annual financial statements
Example (for charities that are incorporated companies)
The [directors / members of the Executive Committee] must prepare annual
financial statements for each accounting reference period as required by
the Companies Ordinance. The financial statements must be prepared to
show a true and fair view and follow accounting standards issued or
– 28 –
adopted by the Hong Kong Institute of Certified Public Accountants or its
successors and adhere to all of its recommended practices.
The [directors / members of the Executive Committee] must keep
accounting records (including donation receipts) as required by the
Companies Ordinance.
Example (for charities other than incorporated companies)
[The Charity] shall keep sufficient records of income and expenditure
(including donation receipts) and proper accounting books, and compile
annual financial statements.
[Note: For clauses 1, 2, 5 and 6 above, companies incorporated by guarantee
may adopt the relevant sample clauses contained in the Standard Form of
Articles of Association prescribed by the Companies Registry (at Appendix III
to its Guidance Notes) at the following website:
http://www.cr.gov.hk/en/companies_ordinance/docs/Guide_Section103-e.pdf] – 29 –
Appendix 3
Clauses Generally Not Acceptable in a Charity’s Governing Instrument
1. Clause which may allow distribution of its incomes and properties amongst
its members or shareholders (for example through payment of dividends
and other distribution, capitalisation of profits, alteration of share capital,
reduction of share capital, share buy-backs, etc.)
2. Clause which may allow payment of remuneration to members of its
governing body (for example Articles 16(1) and 16(2)(a) regarding holding
“position of profit” and on terms “as to remuneration” and Articles 24 and
27(6) in Schedule 3 Model Articles for Companies Limited by Guarantee
to the Companies (Model Articles) Notice (Cap 622H))
3. Clause which may allow distribution amongst its members or shareholders
in specie or kind the whole or any part of its surplus assets upon dissolution
or winding up

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