Charities established in Hong Kong may apply for a status of an “approved charity” from the Inland Revenue Department of Hong Kong.  Such status would confer on the ‘approved charity’ exemption from Hong Kong profits tax, and also allow donations made to it to be tax deductible for the donors who are Hong Kong taxpayers, according to Hong Kong tax law.

The main qualifying criteria to be an ‘approved charity’ is that the activities of the organisation must be exclusively for charitable purposes.   The profits of the organisation must be applied for charitable purposes.    The Hong Kong Inland Revenue Department may require an approved charity to submit books and accounts for review every three or four years, but there is no requirement for approved charities to submit annual financial report.

The somewhat bare-bones requirements make it relatively easy to establish charities enjoying tax benefits in Hong Kong, which could cover social enterprises of different types, scale and charitable purposes, although business enterprises albeit with social purposes or social enterprises with a business or financial purpose would be excluded.

The Hong Kong tax authority has outlined four types of charitable purpose in a tax guide: (i) relief of poverty, (ii) advancement of education, (iii) advancement of religion and (iv) other purposes of a charitable nature beneficial to the Hong Kong community.  While the last category requires the benefit to be towards a cause within Hong Kong, the other three categories can be directed to causes or beneficiaries outside Hong Kong, allowing the ability to establish charities in Hong Kong to support social needs in poorer areas or countries in Asia.

Yet, the list of “approved charities” in Hong Kong, numbering around 7,500 according to data from the Inland Revenue Authority for the year ended 31 March 2013, is not an exhaustive list of organisations in Hong Kong that have been formed or operating for charitable causes.  There are large number of such organisations with stated social aims or missions but not ‘approved charities’ for tax purposes, as this is not a mandatory requirement.   Hong Kong does not administer an approval or registration system for charities.

Charities may also be established in a number of different forms, without any specific statutory prescription on what is or is not acceptable, leaving it somewhat flexible for charities to be structured as appropriate to meet the needs of the organiser, funder or funding method.   Most commonly, charities in Hong Kong are registered as companies limited by guarantee, but there are also charities registered as trusts or societies.

However, the regime without a central record of charitable organisations or regulatory supervision may be changing, if the Hong Kong government adopts the recommendations of the Law Reform Commission, as published in a special report on charities, issued on 6 December 2013.   The report includes recommendations for legislative reform to deepen the regulatory landscape for charities.   There is a push for “approved charities” and all charitable organisations that solicit cash or other donations from the public to be subject to a registration scheme.   The Commission also recommends that there should be a clear statutory definition of what constitutes charitable purpose, to clarify what the term could encompass. A framework for financial reporting may also be put in place.

In relation to financial report, it could involve first having to obtain a fundraising authorisation from a regulatory authority, and being subject to specific requirements to prepare financial statements or auditors’ report depending on the level of funds or income.    Tax-exempt charities may also be required to publish certain information on their financial status and operational activities annually.

Whether the recommendations of the Law Reform Commission would be implemented is still subject to further study by the Hong Kong Home Affairs Bureau, who will seek input and views from relevant authorities and government departments.

Meanwhile, potential donors and philanthropists should be mindful of both the advantages and existing weaknesses in forming or donating to charities in Hong Kong.   For instance, a careful study of the applicable legal status or requirements for a given charity should perhaps be conducted, as should attention be paid to the level of financial reporting of the charity.

In a Citigroup study, Hong Kong is projected to be one of the wealthiest economies by 2020, ranked just after Singapore.  With this, along with Hong Kong’s established standing as a key international financial centre and mature infrastructure for financial activities, charitable and philanthropic activities in Hong Kong should continue to grow.    A well-developed legal framework that ensures accountability and transparency of charities and social organisations should be welcomed.