# Can I claim Interest on Borrowings as a business expense in Hong Kong?

**Partially claimable.** 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.

Typical amount: Variable. Depends on outstanding loan balance and applicable interest rate. Interest rates vary with the lender, the security and the loan term.

## 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. Section 16(2) lists the conditions for interest deductions, including that the money was borrowed to produce chargeable profits and the lender is a financial institution or the interest meets specific tests. Interest paid to an associated person may be limited by rules designed to stop avoidance, so a loan from a director or a group company needs documentation. Transfer pricing documentation is expected for significant related-party transactions.

## 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
- Interest on an overdraft used to pay suppliers and wages

## 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
- Interest on money borrowed for a shareholder's private spending

## 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).

**Important:** Interest on a loan used to fund a long-term asset is deductible only when the asset produces chargeable profits. Where a loan funds both business and private purposes, interest should be apportioned and the loan statements kept for at least 7 years.

Source: https://www.ird.gov.hk/eng/tax/bus_pft_tp.htm

## Related expenses

- [Office Rent](https://accounts-os.com/hk/expenses/rent-office-hk)
- [Equipment and Computer Hardware](https://accounts-os.com/hk/expenses/equipment-computer-hk)
- [Professional and Legal Fees](https://accounts-os.com/hk/expenses/professional-fees-hk)