Depreciation Allowances under Hong Kong Profits Tax
Tax depreciation allowances for the expenditure of fixed assets are available to Hong Kong taxpayers subject to profits tax. It is normally granted on the condition that such fixed assets were acquired to generate assessable income for the taxpayer.
However, pursuant to the Hong Kong tax laws, expenditure of capital in nature are not tax deductible when calculating the profits tax liabilities of an entity.
As such, expenditures on fixed assets such as properties for self-use/rental purposes, office furniture and equipment, motor vehicles, computer hardware and software as well as manufacturing machineries – which are generally regarded as capital in nature – are not tax deductible, but may qualify for tax depreciation allowances.
Let’s have a look at the different types of allowances that could be applied under depreciation.
Types of Depreciation Allowances
The types of depreciation allowances granted to taxpayers generally depends on the nature of the fixed assets acquired. Please find below the basic information as a general reference:
|Nature of fixed assets||Types of depreciation allowances potentially granted||Amount of allowances granted|
|Properties for self-use/rental purposes||Commercial building allowance (CBA) or industrial building allowance (IBA), depending on the nature of the business conducted by taxpayers||CBA: 4% of the qualifying expenditure each year (i.e. annual allowance) IBA: 20% of the qualifying expenditure in the year the qualifying expenditure is incurred (i.e. initial allowance); and 4% of the qualifying expenditure each year (i.e. annual allowance) (see Note below)|
|Office furniture and equipment||10%, 20% or 30% depreciation allowance pool, depending on the nature of office furniture and equipment acquired||60% of the qualifying expenditure in the year of acquisition (i.e. initial allowance) 10%, 20% or 30% of the remaining tax written down value each year since the year of acquisition (i.e. annual allowance)|
|Motor vehicles||30% pool||60% of the qualifying expenditure in the year of acquisition (i.e. initial allowance) 30% of the remaining tax written down value each year since the year of acquisition (i.e. annual allowance)|
|Computer hardware and software, manufacturing machineries||Prescribed fixed assets||100% tax deduction in the year of acquisition|
Note: This basis of calculation of the initial/annual allowances is applied under the scenario that the properties are acquired by the taxpayers on first-hand basis. Different calculation basis will be applied if the properties are acquired on second-hand basis.
Important Points when Claiming Depreciation
- Fixed assets acquired under hire purchase are also granted with depreciation allowances but under different calculation basis.
- Expenditures on intangible assets, such as patents, trademarks and research & development, are also allowed for tax deduction and allowances, which is governed by specific tax laws.
- There might be tax implications and consequences, such as deemed trading receipts, taxable balancing charges, arising from disposals/sales of the fixed assets.
- The claim for the above-mentioned depreciation allowances is subject to certain specific conditions provided under the tax laws of Hong Kong.
How HKWJ Tax Law Partners can help
It may not be straightforward when dealing with the depreciation allowance claims and/or when tax adjustments arising from the disposals of fixed assets are required.
Please seek advice from your tax consultant or lawyer in order to ensure that tax depreciation allowances are properly accounted for.
At HKWJ Tax Law, we have skilled tax consultants with more than 45 years of combined experience. Our team is always up-to-date on the latest regulation and will gladly advice you on tax depreciation allowances applicable to you. Don’t hesitate to contact us via the form below.