Why do self-employed individuals receive tax benefits by incorporating?
This is because companies have more deductible expenses than the deductions and allowances available under personal tax returns, while personal tax deductions and allowances are fixed. Apart from options such as joint assessment, progressive rates, and electing personal assessment, there are not many additional expense items that can be deducted, leaving limited room to implement the most tax-efficient plan.
By contrast, incorporating a Hong Kong limited company offers greater tax-deduction advantages. Under the Inland Revenue Ordinance2, expenses incurred in the production of profits in the course of carrying on a trade, profession, or business are generally deductible. Therefore, self-employed individuals can enjoy a more favourable tax-saving plan by incorporating and claiming deductions through the company.
What expenses can be claimed as tax deductions after setting up a company?
| Common deductible business expenses | Examples |
|---|---|
| Cost of purchasing materials or goods | Raw materials, stock purchases |
| Service expenses required for operations | Accounting fees, cleaning fees |
| Transportation and delivery costs | Freight for ordering and delivery |
| Travel expenses incurred for business trips | Transport costs for meetings, exhibitions, etc. |
| Rent for shops, offices, or warehouses | Office rent, booth rental at exhibitions |
| Water, electricity, gas, and miscellaneous charges incurred in business operations | Utilities for the registered address, internet fees |
| Staff costs, including monthly wages, employee benefits, year-end bonuses, severance payments, and long service payments | Staff-related expenses, training and professional development |
| MPF contributions | Employer MPF contributions |
| Employee benefits, including medical insurance and transport allowances | Group medical insurance, transport costs for overtime |
| Accommodation rental allowance | Staff quarters rent, hotel expenses for business trips |
| Expenses for trademark design, patent applications, and trademark registration | Design agency fees, patent testing fees |
| Bad debts not recoverable from customers | Costs incurred when a customer defaults after you place an order on their behalf |
| Repairs and maintenance expenses incurred in business operations | Repairs for office air conditioners and computers |
| Insurance expenses incurred in business operations | Employees’ compensation insurance, company third-party liability insurance |
| Business entertainment expenses | Meals and refreshments for client meetings |
Further reading: Employer’s Return | What is IR56M?
All of the expenses listed above are incurred in the course of business operations and may be claimed as deductible items in profits tax filing. However, you must retain all relevant receipts and supporting documents, and be able to prove that the expenses were incurred in producing assessable profits.
*General Accounting reminder: It is best to label entertainment expenses as “maintaining the relationship with a particular client”. As entertainment expenses are a common item in tax investigations, we recommend keeping receipts and records for greater protection.
Company tax deductions: Special deduction items
In addition to common deductible business expenses, there are also special deduction items. Please note the relevant requirements when claiming them.
| Special deduction items2 | Key points |
|---|---|
| Expenditure on renovation or refurbishment of buildings5 | Capital expenditure incurred on renovating or refurbishing an office, shop, or warehouse is deductible evenly over five years, starting from the basis period in which the expenditure is actually paid. |
| Expenditure on the purchase of machinery and plant | 100% deductible in the basis period in which the expenditure is incurred. |
| Computer hardware and software expenditure | 100% deductible in the basis period in which the expenditure is incurred. |
| Purchase of environmentally friendly machinery | 100% deductible in the basis period in which the expenditure is incurred. |
| Purchase of environmentally friendly installations | Deductible evenly over five years starting from the year in which the expenditure is incurred. |
| Purchase of environmentally friendly vehicles | 100% deductible in the basis period in which the expenditure is incurred. |
| Depreciation allowances for fixed assets | Office furniture, air-conditioning equipment, machinery, vehicles, etc. may claim 60% in the basis period in which the expenditure is incurred (initial allowance). Thereafter, annual depreciation allowances are calculated on the reducing value of the asset at 10%, 20%, or 30%, as applicable. |
| Commercial buildings and structures6 | For office fitting-out, the annual allowance is 4% of the construction cost. Upon cessation of ownership, a “balancing allowance” may be granted or a “balancing charge” may be imposed. |
| Industrial buildings and structures7 | For industrial building fitting-out, 20% may be claimed as an initial allowance in the basis period in which the expenditure is incurred. Thereafter, an annual allowance of 4% is calculated on the reducing value of the asset. Upon cessation of ownership, a “balancing allowance” may be granted or a “balancing charge” may be imposed. |
| Tax deduction for charitable donations | Donations made to IRD-approved charities8 exceeding HK$100 are deductible, subject to a cap of 35% of assessable profits. |
Benefits of tax savings through incorporation
Corporate tax rates are lower than personal tax rates
Company losses can be carried forward
According to the Hong Kong Inland Revenue Department4, losses incurred by a company in a year of assessment may be carried forward and used to offset the company’s profits in subsequent years.
Example: The company incurred a loss of $100,000 in 2025. In the following financial year, i.e. 2026, it earned $250,000. As the prior-year loss can be used to offset the current-year profit, the assessable profits for 2026 are calculated as follows:
$250,000 (current-year profit) – $100,000 (prior-year loss) = $150,000 (assessable profits). By offsetting losses against profits, tax savings can be achieved.
Tax savings through depreciation allowances on assets
As mentioned above regarding depreciation allowances for fixed assets, please refer to the following example of “tax savings by purchasing a vehicle under a limited company”:
Background:
1. The purchase price of the vehicle can be claimed as a tax deduction through depreciation allowances;
2. Under the Inland Revenue Ordinance, 60% of the vehicle price can be claimed as a deductible expense in the first year, and in subsequent years, 30% of the remaining value can be claimed as depreciation allowances.
Assume a limited company purchases a van for $500,000 for goods delivery purposes:
| 1 | First-year depreciation allowance | Vehicle price x 60% $500,000 x 60% = $300,000 |
| 2 | Remaining depreciable value | Vehicle price - first-year depreciation allowance $500,000 - $300,000 = $200,000 |
| 3 | First-year remaining depreciation allowance | Remaining depreciable value x 30% $200,000 x 30% = $60,000 |
In the above example, in the first year the limited company can already claim depreciation allowances of $300,000 + $60,000 = $360,000.
For more details: Company accounting services
Company tax deductions vs. self-employed tax filing
General Accounting handled a tax planning case in which the client, as a self-employed individual, undertook product transportation work for a food company. After our professional analysis, we advised the client that incorporating to claim tax deductions could provide more tax benefits.
Background:
Mr Chan (pseudonym), single, has no other allowances or deductions apart from the basic personal allowance of $132,000, and still needs to purchase a van, a mobile phone, and a computer for operations.
Assets purchased:
- Van $500,000
- Mobile phone $12,000
- Computer $18,000
Operating expenses:
- Van maintenance: motor insurance, vehicle licence, repairs, averaging $3,000 per month
- Van expenses: parking, fuel, tunnel fees, averaging about $12,000 per month
- Operating expenses: phone bills, internet fees, and other miscellaneous expenses, averaging $2,000 per month
Real-life example of tax deductions through incorporation
Tax calculation for Mr Chan’s limited company
| Income | $50,000 x 12 = $600,000 |
| Expenses | ($3,000 + $12,000 + $2,000) x 12 = $204,000 |
| Director’s remuneration (Mr Chan’s salary) | $20,000 x 12 = $240,000 |
| First-year depreciation allowances | $360,000 |
Mr. Chen's Limited Company First Year Tax Loss
| Revenue | $600,000 |
| Miscellaneous Expenses | $204,000 |
| Director's Remuneration | $240,000 |
| First Year Depreciation | $360,000 |
| Telephone and Computer | $30,000 |
| Loss: | $234,000 |
Mr. Chen's Personal Income Tax
| Director's Remuneration | $240,000 - |
| Personal Allowance | $132,000 |
| Net Chargeable Income | $108,000 |
| Tax Payable | $4,800 |
Example of self-employed tax filing
As Mr Chan files tax as a self-employed individual, he cannot claim any depreciation allowances, expenses, or miscellaneous costs, and can only calculate tax directly based on income of $600,000.
Mr. Chen's Personal Income Tax
| Income | $600,000 - |
| Personal Allowance | $132,000 |
| Net Chargeable Income | $468,000 |
| Tax Payable | $61,560 |
Comparison analysis: tax savings through incorporation vs. self-employed tax filing
Based on Mr Chan’s real case, the difference in tax payable between company registration and self-employed tax filing is as follows:
| Deductible expenses | Amount | Tax savings by setting up a company | Self-employed |
|---|---|---|---|
| First-year depreciation allowance | $300,000 | V | X |
| First-year remaining depreciation allowance | $60,000 | V | X |
| Phone and computer | $30,000 | V | X |
| Miscellaneous expenses | $204,000 | V | X |
| Director’s remuneration | $240,000 | V | X |
From the table above, the first-year depreciation allowances for the van total $360,000, and the company’s loss of $234,000 can be carried forward to the next profits tax year.
Further Reading: When to receive tax returns? A complete guide to tax months, individual/company tax filing, and tax extensions
How can tax planning be used effectively to reduce tax?
Assuming Mr Chan’s limited company makes a surplus of $244,400 in the following year, it can first deduct the prior-year loss of $234,000, leaving assessable profits of only $10,000. General Accounting recommends setting Mr Chan’s director’s remuneration at $240,000 to fully utilise his personal allowance and progressive tax benefits. As a result, Mr Chan would need to pay $4,800 in salaries tax.
If director’s remuneration is set only to cover the basic personal allowance, the company’s profit would increase by $100,000. At 8.25%, the company would need to pay approximately $8,250 in tax. Currently, by incorporating and claiming deductions, Mr Chan only needs to pay $4,800 in tax. This shows that General Accounting’s tax planning secures the maximum tax-saving benefits for Mr Chan.
Why does incorporating and claiming deductions result in less tax than filing as a self-employed individual?
Because a company has more deductible items than a personal tax return, understanding how to flexibly apply tax concessions, company registration, and allowances and deductions within the legal framework can generally achieve tax savings.
However, to calculate the most tax-efficient option, tax planning and engaging a professional accounting firm are required. Using Mr Chan’s arrangement as an example, this is a standalone case and his tax-saving method is not applicable to others, as everyone’s background and income differ.
Three key points to note for tax savings through incorporation
Keep original receipts for expenses
Under statutory requirements, keep all original expense receipts for at least seven years. The IRD may also conduct spot checks on expense and income details. In particular, for company entertainment expenses, records must be accurate and originals must be retained for tax audit purposes.
The more detailed the receipt records, the higher the chance that the expenses can be accepted for tax reduction. Missing receipts or unclear records may affect the deductible amount.
Conduct tax planning
Tax planning is where a professional tax adviser provides clients with the most tax-efficient solution based on their individual background and professional expertise. Even after setting up a company to claim more deductions, if you are not familiar with the Inland Revenue Ordinance, you may not be able to calculate the most favourable tax relief based on your personal circumstances.
Engage an experienced accounting firm
Accounting and tax filing services cover a wide scope. Accounting firms have extensive tax filing experience and are familiar with different tax-saving methods, and can help clients pay the lowest possible tax within what the law allows.
General Accounting has been established for over 20 years. As a diversified accounting and tax filing firm, we provide one-stop services. In addition to tax information, we also offer services such as setting up a sole proprietorship/partnership, incorporating a Hong Kong limited company, replying to IRD enquiries, and handling offshore income tax matters. We provide one-to-one professional follow-up throughout the process and strive to deliver the most tax-efficient solutions based on each client’s background and case, helping clients save time and costs so they can focus on business development.
Frequently Asked Questions
Conclusion
The above outlines how to claim tax deductions by setting up a company, including the tax-saving methods, real-case comparison analysis, and three key points to note. Self-employed individuals may consider incorporating and using tax planning to obtain the maximum tax deductions.
Tax planning requires substantial professional knowledge and a significant amount of time to plan and arrange. In comparison, engaging a professional and reliable accounting firm is more efficient than learning it yourself. In addition, the process of incorporating a limited company and opening a corporate bank account can be relatively complex. General Accounting provides one-stop incorporation and company secretarial services.
Further reading:
Sources
1. Profits Tax for Sole Proprietorships and Partnerships (Overview)
https://www.ird.gov.hk/chi/pdf/pam57c.pdf
2. Profits Tax – Inland Revenue Department
https://www.ird.gov.hk/chi/tax/bus_pft.htm
3. Two-tiered Profits Tax Rates
https://www.ird.gov.hk/chi/faq/2tr.htm
4. Departmental Interpretation and Practice Notes No. 8 (Revised)
https://www.ird.gov.hk/chi/pdf/dipn08.pdf
5. Inland Revenue Ordinance Section 16 – Building renovation expenditure
https://www.elegislation.gov.hk/hk/cap112!zh-Hant-HK
6. Annual allowance for commercial buildings and structures
https://www.elegislation.gov.hk/hk/cap112!zh-Hant-HK
7. Inland Revenue Ordinance Section 34 – Initial and annual allowances for industrial buildings and structures
https://www.elegislation.gov.hk/hk/cap112!zh-Hant-HK
8. IRD-approved charitable donations
https://www.gov.hk/tc/residents/taxes/salaries/allowances/deductions/approveddonation.htm
