Hong Kong’s updated tax rules offer relief for leased property costs

The Inland Revenue Ordinance now allows deductions for restoring rented spaces.

Hong Kong businesses are set to gain significant financial relief with recent amendments to the Inland Revenue Ordinance, aimed at addressing key challenges related to property reinstatement costs and depreciation allowances. The new policies are expected to benefit a wide range of industries, particularly small and medium enterprises (SMEs).

"There are actually two different amendments," said Timothy Loh, Managing Partner at Timothy Loh LLP. "The First Amendment relates to reinstatement costs. It is basically providing tax relief for tenants who have an obligation under the lease to restore the premises to the original condition."

The second amendment focuses on depreciation allowances for commercial and industrial buildings. "It basically addresses two different related issues. The first is an issue of fairness, allowing for the capturing of the depreciation allowances which might otherwise not have been captured. The second is to encourage transactions in older buildings, because buyers of older buildings can now benefit from depreciation allowance," Loh explained.

According to Carol Lam, Director and Head of Tax at BDO, SMEs in the retail and catering sectors are likely to benefit the most. "In particular, those with many retail shops and outlets, they may need to change the location of the retail shops or restaurant more often depending on the market conditions. The reinstatement cost could be a big burden. With the amendments, they are allowed to claim the tax deduction on the reinstatement costs incurred, and could somehow relieve part of their burden," Lam stated.

Loh agreed, adding, "The more obligations that you have for reinstatement, the more you're going to benefit from the tax relief. So to the extent that you're an operator of a business that has a large number of retail outlets, you have leases on these retail outlets, and you have reinstatement obligations, you're going to benefit a lot more from that."

To fully benefit from the new tax deductions, businesses must prioritise compliance with documentation requirements. "There are certain conditions in order to get the benefits, and documentation is one of the most important areas," Lam emphasised.

Loh stressed the importance of understanding lease agreements. "If it's in your lease, if it is a binding obligation, then that's a reinstating obligation for the purpose of the amendment, and you'd be able to capture the reinstatement cost," he said.