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The Taxation of Grants, Subsidies and Similar Financial Assistance in Hong Kong

Section 15(1)(c) of the Inland Revenue Ordinance (IRO)1 was enacted in 1971, and brought within the charge to Hong Kong profits tax: “[s]ums received by or accrued to a person by way of a grant, subsidy, or similar financial assistance in connection with the carrying on of a trade, profession, or business in Hong Kong, other than sums in connection with capital expenditure made or to be made by the person”. Such grants and subsidies are deemed to be Hong Kong source profits arising in or derived from a trade, profession, or business carried on in Hong Kong, and are accordingly chargeable to profits tax under section 14 on that footing. There remains, however, an unresolved ambiguity in the scope of the words “grant, subsidy, or similar financial assistance”. Despite having been enacted over 40 years ago, section 15(1)(c) has never been properly considered by the higher courts of Hong Kong, or even substantively analysed by the Board of Review. In the absence of such authoritative jurisprudence, the Hong Kong Inland Revenue Department (IRD) has taken the position that it will apply this provision broadly enough to include situations where there has been a gratuitous payment or some other form of financial assistance involving the conferral of some bounty (i.e., a gratuitous economic benefit) between two private law parties.