Charitable institutions with tax exemption status accorded by section 88 of the Inland Revenue Ordinance (Cap. 112) enjoy exemptions of stamp duty on transfer of any immovable property or Hong Kong stock, business registration fee, and profits tax on all their income which is solely applied for charitable purposes. Individual and business donors can also claim tax deduction for their approved charitable donation to these tax-exempt charities.
Application for the Exemption from Tax
Charities do not automatically enjoy tax exemption status upon incorporation. Entities wishing to seek tax exemption status will have to submit an application letter requesting for recognition of tax exemption status to the Inland Revenue Department (the “IRD”) together with the following documents:
- a copy of the relevant certificate of registration;
- a certified true copy of the instrument and rules governing its activities, i.e. the Articles of Association in the case of a limited company;
- a list of activities that have been carried out in the past twelve (12) months (or less, if appropriate)
- a list of activities planned for the next twelve (12) months;
- a copy of its accounts for the last financial year (if the organisation has been established for eighteen (18) months or more); and
- a list of members of the governing body (e.g. directors, trustees, etc.).
In case the application is made prior to the incorporation, only the draft articles of association and the list of proposed directors are required to be submitted.
Requirements of the Governing Instrument
Concerning the Articles of Association, the IRD will review and ensure that it contains:
- a clause stating precisely and clearly the charity’s objects;
- a clause limiting the application of its funds towards the attainment of its stated objects;
- a clause prohibiting distribution of its incomes and properties amongst its members;
- a clause prohibiting members of its governing body (e.g. directors) from receiving remuneration;
- a clause requiring members of its governing body (e.g. directors) to disclose material interest and not to vote in respect of a transaction, arrangement or contract in which they are so interested;
- a clause specifying how the assets should be dealt with upon its dissolution (normally, the remaining assets should be donated to other charities); and
- a clause requiring the keeping of sufficient records of income and expenditure (including donation receipts), proper accounting books and compilation of annual financial statements.
Obligations of Tax-exempt Charities
Provided that all relevant information is supplied with the application and the governing instrument is in order, tax exemption would then normally be granted within four (4) months upon receipt of the application. The IRD will issue a written confirmation and include the entity’s name in the list of tax-exempt charitable institutions on its publicly accessible website.
Tax-exempt charities should bear in mind that they have the duty to submit accounts and annual reports, and the duty to inform the IRD of the change in their circumstances such as the alteration of its articles of association, as the IRD will review their status from time to time to ensure that their objectives are still charitable and their activities are compatible with their objectives.
Aspiring charity founders are strongly advised to seek proper legal advice about the format, content and legal sufficiency of the charity’s governing instrument, as well as seeking professional help in fulfilling the compliance requirements.
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