Understanding capital allowances in Hong Kong

Capital Allowance Hong Kong Tax Rules

A capital allowance is a tax deduction granted by the Inland Revenue Department for capital expenditure on qualifying assets, replacing accounting depreciation for profits tax purposes. The capital allowance hong kong regime lets businesses recover the cost of assets like plant and machinery, industrial buildings, and commercial buildings over time through prescribed annual deductions. These deductions are set out in the Inland Revenue Ordinance and are claimed in the annual profits tax return (Form BIR51 for corporations).

Hong Kong Tax Depreciation Allowance

The Hong Kong tax depreciation allowance system provides two main types of deduction for capital assets: an initial allowance in the year of acquisition and an annual allowance in subsequent years. Allowances are calculated on the asset's cost, not the accounting depreciation charged in the financial statements. When an asset is sold, a balancing allowance or balancing charge arises to adjust for any difference between the tax-written-down value and the sale proceeds.

Plant and Machinery Allowance Hong Kong

For plant and machinery allowance Hong Kong claims, the Inland Revenue Department permits an initial allowance of 60% of the capital expenditure in the year the asset is acquired and brought into use. An annual allowance, also called a writing-down allowance, is then granted on the reducing balance at rates specified by the Commissioner. The standard rate is 20% per annum. A 30% rate is available for certain plant and machinery specified in the Inland Revenue Rules.

Industrial Building Allowance Hong Kong

The industrial building allowance Hong Kong applies to capital expenditure on buildings used for manufacturing, processing, or storage. An initial allowance of 20% is available in the year of expenditure. This is followed by an annual allowance of 4% on the cost until the building is fully written down. A balancing allowance or charge applies on disposal.

Capital Expenditure Deduction Hong Kong

A capital expenditure deduction Hong Kong is available only where the expenditure is of a capital nature and the asset is used in the production of assessable profits. Revenue expenditure, such as repairs and maintenance, is deductible in full in the year incurred and does not qualify for capital allowances. The distinction between capital and revenue expenditure is determined by the nature of the outlay, not its size.