Hong Kong Retail & Franchise Tax — Expert Advisory

Inventory should be valued at the lower of cost or net realisable value. Acceptable cost methods include FIFO and weighted average. LIFO is not accepted by the IRD. The chosen method should be consistently applied year-to-year and any change requires IRD notification and may require retrospective adjustment.

Under s.20B of the IRO, royalties paid to non-resident persons for use of intellectual property in Hong Kong are subject to withholding tax. The effective rate is typically 4.95% (30% of the 16.5% profits tax rate) of the gross royalty payment. The Hong Kong payer must withhold and remit this to the IRD.

Rent-free periods are typically lease incentives that should be spread over the full lease term for accounting purposes. However, for tax purposes, the IRD generally follows the accounting treatment if consistently applied. Landlord contributions to fit-out costs may reduce the cost base for capital allowance purposes.

Yes. Normal inventory shrinkage (theft, damage, spoilage) that is inherent to the retail trade is a deductible business expense. The amount should be based on physical stock counts and reconciled to inventory records. Abnormal losses may face closer IRD scrutiny and require documentation.

If your retail business buys goods offshore and sells them in Hong Kong, the profits may be fully taxable in HK. However, if buying and selling both occur offshore (e.g., a trading subsidiary), those profits may qualify as offshore-sourced and not subject to HK profits tax. Since 2023, the Refined FSIE regime applies to passive income — retail trading profits are generally not affected.