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Charities: to tax or not to tax?


In Hong Kong SAR, there is no statutory definition of what constitutes a charitable institution or trust of a public character (“Charity”) with a charitable purpose, nor is there a single piece of legislation which governs Charities in Hong Kong and how donations are applied. In 2017, the Hong Kong SAR Government’s Audit Commission reviewed various government departments’ supervisory measures on Charities and it advocated strengthening supervision thereon.

Four heads of charity 

According to Section 88 of the Inland Revenue Ordinance (“IRO”), Charities should apply to the Commissioner of Inland Revenue if they wish to enjoy tax exemption.   In processing tax exemption applications of Charities, the Hong Kong Inland Revenue Department (“IRD”) has all along made reference to the case law in the common law.  In general, tax-exempt Charities must be of a public character and established solely for charitable purposes recognized by the law.  According to past case law, “charitable purposes” include (a) relief of poverty; (b) advancement of education; (c) advancement of religion; and (d) other purposes of charitable nature that are beneficial to the community. These are commonly known as the “Four heads of charity”.

S.88 exemption 

According to IRO S.88, where a trade or business is carried on by any Charity, the profits derived from such trade or business shall be exempt and shall be deemed to have been exempt from tax only if such profits are applied solely for charitable purposes and are not expended substantially outside Hong Kong and either: (a) the trade or business is exercised in the course of the actual carrying out of the expressed objects of such institution or trust; or (b) the work in connection with the trade or business is mainly carried on by persons for whose benefit such Charity is established.

Salient points from the revised Tax Guide

In April 2020, the IRD published a revised version of “Tax Guide for Charitable Institutions and Trusts of a Public Character” (“the revised Tax Guide”), giving more comprehensive explanations with examples to its earlier version in September 2019. For the revised Tax Guide, we would like to highlight some salient points:

  1. Indicia of carrying on business
  2. Primary purpose or ancillary trade/ business
  3. Financial investments
  4. Property letting

1.  Indicia of carrying on business 

Whilst the totality of facts would be considered, the IRD states that the key indicia in determining whether the activities carried on by the Charity amount to the “carrying on a business” are:

  • The intention of carrying on a business;
  • The nature of the activities performed, particularly whether they have a profit-making purpose;
  • Whether such activities are repeated and regular or organized in a business-like manner;
  • The size and scale of the Charity’s activities including the amount of capital employed; and
  • Whether the activities are better described as a hobby or recreational activities.

2.  Primary purpose or ancillary trade/ business 

A charity can be exempt from profits tax in respect of the profits from a trade/ business that contributes directly to an expressed object of the Charity (i.e. a primary purpose of the trade/ business) and/ or an ancillary trade/ business. In the revised Tax Guide, sample activities are enlisted to illustrate what may be exempted from profits tax. It is specifically mentioned in the revised Tax Guide that a Charity’s trading transactions would not be regarded as ancillary simply because its purpose is to raise funds for the Charity.

3.  Financial investments 

The revised Tax Guide states that a Charity may invest in order to achieve a financial return so that it can further Charity’s objects and, normally, such an investment is expected to be made in a proper and prudent manner to yield best return within an acceptable level of risk. Also, the determination of whether the investments are of capital or revenue nature is a question of fact and degree. The investment mandate, pre-defined model portfolio and the “badges of trade” are all relevant factors to be considered.

4.  Property letting 

The guide clarifies that if a Charity’s property letting is not carried out in the course of the actual carrying out of its expressed objects, the rental income earned should be chargeable to profits tax.

The IRD’s clarified views on what income is exempt from tax would have a significant impact on some Charities. We strongly recommend Charities to seek professional assistance to review their current tax position and consider if a restructuring is needed. This is not only for a Charity to preserve the financial capabilities of deploying resources for charitable purposes but to preserve its reputation.

For any enquiries, please contact our May Tung (T: 36430726: E: ).

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