Hong Kong SAR

Corporate - Income determination

Last reviewed - 30 June 2022

Inventory valuation

Inventory may be stated at the lower of cost or market value. Last in first out (LIFO) may not be used for tax purposes. First in first out (FIFO) must be consistently applied.

The prevailing accounting standards require financial instruments to be carried at market value, with fluctuations in values of such assets and liabilities taken to the profit and loss account in the year they arise, irrespective of whether the revaluation gains or losses are realised (i.e. the ‘fair value basis’). Following the court decision in the Nice Cheer case, the increases (unrealised gains) in the market values of trading securities are not taxable while the decreases (unrealised losses) may be deductible if they represent a provision for diminution in value that is material and likely to be permanent. For years of assessment of which the basis period begins on or after 1 January 2018, taxpayers may make a generally irrevocable election to adopt the above-mentioned fair value basis to account for their financial instruments for tax purposes, subject to certain conditions and with certain exceptions. Whether the amounts recognised in the profit and loss account are taxable or deductible will continue to be subject to the source rules and the nature (i.e. capital vs revenue) of the amounts.

There are special tax provisions for valuation upon cessation of a business under which inventory is valued at market value, unless it is sold to a person carrying on business in Hong Kong SAR, who may deduct a corresponding amount as the cost of the inventory in computing the assessable profits.

There are also special tax provisions for valuation when (i) there is a change of intention for holding something as trading stock to capital asset or vice versa, or (ii) trading stock of a trade has been acquired or disposed of otherwise than in the course of the trade. In such circumstances, valuation based on the market value will apply.

Capital gains

Gains from realisation of capital assets or receipts that are capital in nature are not taxed.

Dividend income

Dividends from local companies chargeable to tax are exempt, whereas dividends from overseas companies are generally offshore in nature and not subject to Hong Kong profits tax.

Interest income

Hong Kong sourced interest income received by or accrued to a corporation carrying on a trade or business in Hong Kong SAR is subject to profits tax. Exemption is provided to interest income derived from any deposit placed in Hong Kong SAR with a financial institution, unless the deposit secures a borrowing where the interest expense is deductible. This exemption, however, does not apply to interest accruing to a financial institution.

Interest accruing to a bank or financial institution will be deemed to be sourced and taxable in Hong Kong SAR if the interest arises through or from the carrying on of business in Hong Kong SAR by the bank or financial institution.

Interest income arising through or from the carrying on of an intra-group financing business in Hong Kong SAR by a corporation (other than a financial institution) will be deemed to be sourced and taxable in Hong Kong SAR.


Royalties received by or accrued to a non-resident for the use of or right to use in Hong Kong SAR or outside Hong Kong SAR (if the royalties are deductible in ascertaining the assessable profits of a person for Hong Kong profits tax purposes) a trademark, patent, design, copyright material, layout-design of an integrated circuit, performer’s right, plant variety right, secret process or formula, or other property of a similar nature, or for the exhibition or use in Hong Kong SAR of cinematograph or television film or tape, any sound recording, or any advertising material connected with such film, tape, or recording, are deemed to be taxable in Hong Kong SAR. A total of 30% of the sum received or accrued is deemed to constitute profits subject to tax in normal situations. Where such royalties are received by or accrued to an associate, however, 100% of the sum is deemed to constitute profits under certain circumstances.

In addition, royalties for the use of or right to use outside Hong Kong SAR any IP or know-how generated from any research and development (R&D) activity in respect of which a tax deduction for R&D expenditure is allowable in ascertaining the assessable profits of the recipient of the royalties are deemed to be taxable in Hong Kong SAR.

Partnership income

Partnership business is taxed as a single entity, although each partner can use its share of losses incurred by a partnership to offset against the assessable profits of its other business. In general, there is no special registration requirement other than business registration for a partnership. The assessable profits of a partnership are basically determined in the same way as those of a corporation, with certain special rules (e.g. salaries or other remunerations paid to a partner or a partner’s spouse are not deductible).

Unrealised exchange gains/losses

Unrealised exchange gains/losses arising from financial instruments that are revenue in nature and with a Hong Kong source are taxable/deductible if they are recognised in the profit and loss account in accordance with a specified financial reporting standard (which means the Hong Kong Financial Reporting Standard [HKFRS] 9, the International Financial Reporting Standard 9 [Financial Instruments], or equivalent) and an election has been made by the taxpayer to adopt a fair value basis for profits tax filing purposes.

For other cases, taxpayers may exclude any unrealised foreign exchange gains or losses in the tax computation and bring them back for assessment or deduction when they become realised in subsequent years, provided that such realisation basis is adopted consistently for profits tax filing purposes.

The nature and source of exchange gains/losses are determined by the nature and source of the underlying transactions. Exchange gains/losses arising from ordinary business transactions (e.g. trade receivables or payables) are taxable/deductible whereas exchange gains/losses arising from capital transactions (e.g. sale of capital assets) are non-taxable/non-deductible.

Foreign income

Hong Kong resident corporations are not taxed on their worldwide income. Foreign-sourced income, whether or not remitted to Hong Kong SAR, is not taxed. As such, there is no specific tax provision dealing with deferral or non-remittance of foreign earnings. Nor does Hong Kong SAR have any controlled foreign company (CFC) legislation.