Can a Hong Kong company deduct the owner's salary and director's fees?

Company and owner-director. A company is a separate taxpayer. Remuneration paid to a director or shareholder-employee is deductible if it is genuinely paid for services and meets the normal "incurred in producing profits" test. The director then reports it as income from employment or an office and pays salaries tax on it (see the salaries tax answer).

Reasonableness. Pay that is excessive, or that is really a disguised dividend or distribution, may be challenged by the Inland Revenue Department (IRD). Keep contracts, board minutes and payroll records.

Employer duties. The company must report remuneration paid to directors and employees to the IRD each year on the employer's return (see the answer on the employer's return deadline), and contribute to Mandatory Provident Fund (MPF) where required.

Sole proprietorship and partnership. The business is not a separate legal person. The Inland Revenue Ordinance bars deducting remuneration or interest on capital paid to the proprietor or partners (or spouses). An owner's drawings are not an expense; the profit is taxed whether or not it is withdrawn.

Mixed planning. Choosing between salary and dividends affects both tax and MPF. Dividends are not taxed in Hong Kong in the normal case, but the amount of salary affects deductions, allowances and mandatory contributions, so get advice for your facts.