Understanding Section 88 of the Inland Revenue Ordinance

Section 88 of the Inland Revenue Ordinance (IRO) provides the legal foundation for charitable tax exemption in Hong Kong. Under this provision, qualifying charitable institutions and trusts of a public character are granted exemption from profits tax, enabling them to maximize resources directed toward their charitable missions.

What Qualifies as Charitable Purposes?

To qualify for Section 88 exemption, an organization must be established exclusively for one or more of the following recognized charitable purposes:

• Relief of poverty – Programs and services that alleviate financial hardship and improve living conditions for the poor
• Advancement of education – Educational institutions, scholarship programs, research initiatives, and educational support services
• Advancement of religion – Religious organizations and activities that promote spiritual development and religious practice
• Other purposes beneficial to the community – Health services, environmental protection, arts and culture, community development, and other activities that provide public benefit

Recent Amendments and Updates (2023-2025)

1. New Formalized Application Procedures (2023-2024)

In response to the Hong Kong SAR Government’s March 2023 Policy Statement on developing family office businesses, the Inland Revenue Department introduced significant procedural changes to support Hong Kong’s development as a philanthropic center for global family offices and philanthropists.

Key Changes to the Application Process:

• Standardized Application Form: The IRD has formalized procedures by creating a comprehensive application form that consolidates all required information and documents, replacing the previous less structured submission process
• Enhanced Activity Documentation: Applicants must now provide detailed activity descriptions using a new proforma included in the Annex to the application form
• Additional Information Requirements: New fields for organizations intending to take over or replace existing entities after obtaining tax exemption status
• Trust-Specific Requirements: Trusts must provide a list of members/settlors as part of the application
• Governing Instrument Guidance: The IRD has provided enhanced guidance on writing charitable purposes in governing instruments to ensure clarity and compliance

2. Proposed Endowment Fund Enhancement (2024)

Following the 2024/25 Budget speech and the Chief Executive’s 2024 Policy Address, the Financial Services and Treasury Bureau issued a consultation paper on November 25, 2024, proposing significant enhancements to tax regimes for funds, including charitable endowment funds.

Proposed Definition of “Endowment Fund”:

Under the proposed Unified Fund Exemption (UFE) regime enhancement, an endowment fund is defined as:

• An arrangement established and funded by a charitable entity
• For the purpose of carrying out financial activities
• Holding and managing a pool of assets for the benefit of such charitable entity
• Where the charitable entity means a charitable institution or trust of a public character that is exempt from tax under Section 88 of the IRO

This enhancement would allow pension funds and endowment funds to qualify as ‘funds’ under the UFE regime, providing additional tax advantages for charitable investment vehicles.

3. Enhanced Monitoring and Transparency Measures (2018-Present)

Since 2018, the government has implemented administrative measures to strengthen charitable sector accountability:

• Public Disclosure: Publishing audited accounts from approved fund-raising organizations on GovHK’s website
• Best Practice Guidance: Issuance of the “Good Practice Guide on Charitable Fund-raising” with encouragement for voluntary adoption
• Dedicated Hotline: Establishment of a complaint and inquiry hotline for charitable fund-raising activities
• Regular Reviews: The IRD regularly reviews tax-exempt charities to ensure objectives remain charitable and activities align with stated purposes

4. Ongoing Discussions on Regulatory Framework

Following the formal implementation of the amended Charity Law of the People’s Republic of China on the Mainland since September 5, 2024, there have been discussions about whether Hong Kong authorities will enact a comprehensive Charity Ordinance. The government has indicated that establishing a dedicated regulatory department requires thorough study due to significant implications for charitable operations.

Section 88 Tax Exemption Requirements

Core Eligibility Conditions

Charities are exempted from profits tax when they satisfy the following conditions stipulated in Section 88 of the IRO:

Governing Instrument Requirements

A charity’s governing instrument is a formal document that must include:

Registration and Application Process

Step-by-Step Application Procedure

1. Review Tax Guide: Read the IRD’s “Tax guide for charitable institutions and trusts of a public character” and “Notes to Applicants” thoroughly before preparing your application
2. Complete Application Form: Fill out the standardized application form with all required information, including:
   • Organization details and legal structure
   • Governing instrument provisions
   • Charitable purposes and objectives
   • Detailed activity descriptions using the IRD proforma
   • Governance structure and member information
3. Gather Required Documents:
   • Certified true copy of governing instrument (Articles of Association, Trust Deed, Constitution, etc.)
   • List of activities carried out in the past 12 months (or less if newly established)
   • List of planned activities for the next 12 months
   • Copy of accounts for the last financial year (if established for 18+ months)
   • List of governing body members (directors, trustees, etc.)
   • For new charities: list of founder members/settlors (for trusts)
4. Submit Application: Send completed application with all supporting documents to:

   Commissioner of Inland Revenue
   G.P.O. Box 132
   Hong Kong

5. IRD Review: The Department endeavours to respond within 4 months if all relevant information is provided and no further clarification is needed
6. Approval and Listing: Upon approval, the IRD issues written confirmation and adds the organization to the public list of tax-exempt charitable institutions on its website

Timeline Expectations

Approved Charitable Donations: Tax Deduction for Donors

Donation Deduction Rules

Individuals and businesses who make approved charitable donations can claim tax deductions subject to specific limits and requirements.

What Donations Qualify?

• Direct monetary donations to Section 88-exempt charities
• Bank transfers or cheques made payable to approved charitable organizations
• Online donations through authorized payment platforms to registered charities
• Government donations for charitable purposes

What Does NOT Qualify?

• Purchase of lottery tickets or raffle tickets
• Admission tickets for charity shows or events
• Purchase of a grave space
• Purchase of goods in charity bazaars
• Payment for services such as saying prayers or reservation of space for ancestral worship
• Donations of property, works of art, or other non-monetary assets
• Donations made in the name of your children (must be in your name or your spouse’s name if not living apart)

Documentation Requirements

Donors should retain proper donation receipts that include:

• Full name of the charity as shown in its constitutional document
• Clear indication that the transaction is a donation (not a purchase or payment for services)
• Amount donated and date of donation
• Official charity stamp or signature

The IRD may request these receipts to support your claim for tax deduction during assessment or audit.

Ongoing Compliance and Reporting Obligations

Annual Compliance Requirements

To maintain Section 88 tax-exempt status, charities must fulfill ongoing obligations:

IRD Review and Monitoring

The Inland Revenue Department regularly reviews tax-exempt charities to:

• Ascertain whether their objects remain of a charitable nature
• Verify that activities are compatible with stated charitable objectives
• Ensure compliance with Section 88 requirements
• Confirm that profits continue to be applied solely for charitable purposes

Consequences of Non-Compliance

Failure to maintain compliance can result in:

• Withdrawal of tax-exempt status – In 2024, 267 charities had their exemptions withdrawn
• Back taxation – Liability for profits tax on income previously considered exempt
• Loss of donation deductibility – Donors can no longer claim tax deductions for contributions
• Reputational damage – Public listing removal and reduced public trust

Current Statistics and Trends

Hong Kong Charitable Sector Overview (As of September 30, 2024)

The data demonstrates a healthy and growing charitable sector in Hong Kong, with new applications exceeding withdrawals by a significant margin. The government’s initiatives to develop Hong Kong as a philanthropic center appear to be encouraging new charitable formation while maintaining quality control through regular reviews.