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6.3. Depreciation and Amortization

Depreciation in Hong Kong may be calculated using the straight-line method, the diminishing balance method, and the units of production method. Assets may be re-valued upwards, but tax depreciation is based on cost.

When calculating Hong Kong taxable income, a business enterprise may deduct deprecation charges on fixed assets, where those fixed assets are used in the production of profits arising in or derived from Hong Kong. The deductibility requires the disallowance of accounting depreciation and substitution of tax deductible capital allowances.

The following outlines the main rules for depreciation allowances for asset types.

Fixed Assets

Industrial Building and Structures

Depreciation allowances are given in respect of capital expenditure incurred on the construction of new industrial buildings and structures including those used in trades such as transport, dock, water and electricity undertakings, the manufacture, processing or storage of goods and trades carried on in mills and factories and in farming.

An initial allowance of 20% is granted in the year of expenditure. An annual allowance of 4% of the expenditure is given until the total expenditure is written off. Expenditures on used industrial buildings and structures do not qualify. When the asset is disposed of, a balancing allowance or charge is due based on the difference between the disposal price and the written down value on disposal.

Commercial Building and Structures

Depreciation allowances are given in respect of capital expenditure incurred for the construction of buildings or structures which are not qualified as industrial, but are used for a trade, profession or business (other than as stock in trade).

An annual allowance of 4% is given beginning in the year of expenditure, until the total expenditure is written off. Expenditures on used commercial buildings and structures do not qualify.

When the asset is disposed of, a balancing allowance or charge is due based on the difference between the disposal price and the written down value on disposal.

Renovation or Refurbishment

Capital expenditure on the renovation or refurbishment of business premises may be deducted over five years in equal installments, starting in the year the expenditure was incurred.

Plant and Machinery

Depreciation allowances are given in respect of capital expenditure incurred on the purchase of plant and machinery.

Expenditure on plant and machinery especially related to manufacturing, and on computer hardware and software, may be written off in full in the year the expenditure is incurred. However, assets purchased under hire-purchase arrangements or assets leased to other persons, do not qualify for the 100% allowance.

Other non-manufacturing plant and machinery expenditures are granted an initial allowance of 60% in the year of expenditure. An annual allowance of 10%, 20% or 30% under the declining-balance method is available on the balance of the expenditure beginning in the year the asset is first used in the business. The rate allowed is based on the estimated working life of the particular plant or machinery, unspecified types usually receive a 20% rate. Items qualifying for the same rate of allowance are grouped under one pool.

When the asset(s) is disposed of, a balancing allowance or charge may apply, but only on cessation of a business where there is no successor. The allowance or charge is based on the difference between the disposal price and the written down value of the whole pool of assets.

Environmental Protection Facilities

A 100% allowance is given for capital expenditure on plant and machinery for environmental protection facilities in the year of expenditure.

For installations forming part of a building or structure, a 20% yearly allowance is given for five consecutive years.

Motor Vehicles

An allowance of 60% is given for motor vehicles in the year of purchase. An annual allowance of 30% under the pooling system (declining-balance method) is allowed on the balance of the expenditure beginning in the year the asset is first used in the business.

A 100% allowance in the year of expenditure is given for environmentally friendly vehicles (hybrid electric vehicles and electric vehicles).

When an eligible vehicle is used both for business and private purposes, the deduction is apportioned accordingly. Also, if an otherwise eligible vehicle is leased, the leasing expenditure will not be given a depreciation allowance.

Recapture

Depreciation allowances are generally subject to recapture if the proceeds from the sale of a depreciable asset exceed its tax-depreciated value. The recapture rule also applies to manufacturing plant and machinery and computer hardware and software, as well as environmental protection machinery and installations that were previously written off in full. Consequently, in the year of disposal, the sales proceeds from such assets are generally included in chargeable profits, up to the original costs of the assets.

Allowances for industrial and commercial buildings may be recaptured, up to their original costs.

Assets depreciable under the pooling system (declining-balance method) are allocated to one of three pools according to their depreciation rates, which are 10%, 20% or 30%. Proceeds from the sale of an asset in a pool (up to the cost of the asset) are deducted from the pool balance. If a negative balance results within the pool, a balancing charge is added to taxable profits.

A balancing allowance is available only on the cessation of a business when the disposal proceeds of the assets are below the reducing value of the entire pool of assets. A balancing charge may arise if the disposal proceeds of one or more assets exceed the reducing value of the whole pool of assets to which the disposed items belong.

Intangible Assets / Amortization

Hong Kong provides amortization allowances for capital expenditures incurred on the purchase of registered trademarks, copyrights and registered designs (IPR) used in the production of taxable profits. Acquisition costs can be amortized over five years using the straight-line method beginning the year of the IPR acquisition.

In addition, Hong Kong provides for a 100% allowance in the year of expenditure for patent rights and rights on know-how used in the production of taxable profits

The following restrictions apply for amortize allowance for IPRs:

  • Trademarks and designs must be registered in Hong Kong or overseas in order to receive the amortization allowance, there is no registration requirement for copyrights
  • Taxpayers acquiring unregistered trademarks or designs are not eligible to claim any amortization allowance, even if the designs or trademarks are registered immediately after the acquisition
  • IPR purchased wholly or partly from an associate will not qualify for allowances
  • If the IPR is used partly in generating income (subject to tax), and partly for other purposes, an allowable amortization is proportionate
  • There is a claw-back provision to recapture prior amortization allowances, if registration of the IPR is later invalidated, revoked or surrendered
  • Anti-avoidance provisions preclude the allowances for group restructurings