Charitable institutions may be granted tax exemption under section 88 of the Inland Revenue Ordinance.

Charity is not equivalent to "voluntary" or "non-profit-making" organisation
Not all "Voluntary" or so-called "non-profit-making" organisations are charities, however worthy their causes may be. In fact, there is no provision in the Inland Revenue Ordinance which exempts a "voluntary" or "non-profit-making" organisation from tax.

Charity must be established exclusively for charitable purposes
Generally speaking, for an institution or a trust to be a charity, it must be established for purposes which are exclusively charitable according to law. The law defining the legal attributes of a charity is based upon case law developed through court decisions.

Charitable purposes are classified into four heads
For practical purposes, the purposes that may be accepted as charitable are:

1. relief of poverty;
2. advancement of education;
3. advancement of religion; and
4. other purposes of a charitable nature beneficial to the community not falling under any of the preceding heads.

While the purposes under the first three heads may be in relation to activities carried on in any part of the world, those under head (d) will only be regarded as charitable if they are of benefit to the Hong Kong community.

Charity must be established for public benefit
A purpose is not charitable unless it is directed to the public or a sufficient section of it. An institution cannot generally be charitable if it is in principle established for the benefit of specific individuals. It is, however, not possible to lay down any precise definition of what constitutes a sufficient section of the public. Each case must be considered on its own merit.

Charity should have a governing instrument
It is essential that a charity is established by a written governing instrument. The type of instrument adopted will depend on the particular circumstances pertaining to the charity proposed and the preference of the promoters or founders. Persons who are considering starting a charity are advised to seek legal advice about the format, content and legal sufficiency of the charity's governing instrument. Before seeking advice, persons founding a charity must be clear in their own minds as to the purposes of the charity and the manner in which they wish the charity to be administered. Briefly the most common types of structures are:

1. a trust;
2. a society established under the Societies Ordinance (Cap 151);
3. a company incorporated under the Companies Ordinance (Cap 32); and
4. a statutory body established by the Hong Kong legislature.

In exceptional circumstances, granting tax exemption to some ad hoc committees established for charitable purposes may be possible. Though preparation of governing instrument is strictly not required for a committee of this nature, minutes of the meeting establishing such committee must be ready for inspection.

Clauses that the governing instrument of a charity should generally contain include:

1. clauses stating precisely and clearly its objects (This also applies to companies incorporated under the Companies Ordinance on and after 10 February 1997 and not required to state their objects in their Memoranda of Association);
2. clause limiting the application of its funds towards the attainment of its stated objects;
3. clause prohibiting distribution of its incomes and properties amongst its members;
4. clause prohibiting members of its governing body (e.g. directors, trustees, etc) from receiving remuneration;
5. clause specifying how the assets should be dealt with upon its dissolution (The remaining assets should normally be donated to other charities);
6. clause requiring the keeping of sufficient records of income and expenditure (including donation receipts), proper accounting books and compilation of annual financial statements; and
7. clause excluding the powers set forth in the Seventh Schedule to the Companies Ordinance (in case the charity is a company incorporated under such Ordinance).