Can I Claim Interest on Borrowings as a Business Expense in Hong Kong?
Interest on money borrowed to produce assessable profits is deductible. Interest on personal loans or loans for non-income-producing purposes is not. Related-party loan interest is subject to transfer pricing and thin capitalisation rules.
What Inland Revenue Department (IRD) says
Section 16(2) of the Inland Revenue Ordinance allows deduction of interest on money borrowed and used to produce assessable profits. Interest on capital loans (to fund purchase of capital assets) may be deductible if the underlying income is assessable. Related-party interest must be on arm's-length terms. OECD-aligned transfer pricing rules have applied since 2018 and limit deductions on related-party debt that exceeds arm's-length levels.
When you can claim
- Interest on a bank loan used to fund working capital or purchase trading stock
- Interest on a mortgage on commercial premises used for the business
- Interest on hire purchase or financing agreements for business equipment
- Interest on related-party loans where the terms are at arm's length and documented
When you cannot claim
- Interest on personal loans or credit cards used for personal expenditure
- Interest on loans used to fund private investment activities that do not generate assessable HK profits
- Related-party interest that fails the arm's-length test under transfer pricing rules
- Interest on loans where the funds are not demonstrably deployed in the business
Good to know
Pro tip: For related-party loans between HK companies and their overseas parent or affiliate, document the commercial rationale, interest rate benchmarking, and ensure the terms reflect what unrelated parties would agree. Transfer pricing documentation is mandatory for significant related-party transactions under the IRD's rules (effective from year of assessment 2018/19).
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