Tax Deduction for Environment-friendly Vehicles

As from the year of assessment 2010/11, taxpayers may claim deduction under profits tax in respect of the specified capital expenditure incurred on environment-friendly vehicles.

Part 3 of Schedule 17 of the Inland Revenue Ordinance sets out the eligible environment-friendly vehicles which cover the following three categories:

The specified environment-friendly vehicles do not include any vehicle in which any person holds rights as a lessee under a lease.

EPD will promulgate on its homepage the vehicle models which are "Environment-friendly Commercial Vehicles" and "Environment-friendly Petrol Private Cars" eligible for tax concession and will update the information from time to time. However, the "Tax Incentives Scheme for Environment-friendly Petrol Private Cars" was terminated on 1 April 2015. Taxpayers may seek verification from EPD if they have doubts about the eligibility of their vehicles for the new tax deduction.

EPD will issue certificates for environment-friendly vehicles under the "Tax Incentives Scheme for Environment-friendly Commercial Vehicles" and "Tax Incentives Scheme for Environment-friendly Petrol Private Cars". When purchasing "Environment-friendly Commercial Vehicles" or "Environment-friendly Petrol Private Cars", taxpayers should obtain a copy of the certificate from the vehicle supplier for tax filing purposes. However, the "Tax Incentives Scheme for Environment-friendly Petrol Private Cars" was terminated on 1 April 2015. Hybrid electric vehicles and electric vehicles are both eligible for tax deduction and no verification from EPD is required. Taxpayers claiming for deductions should specify the respective categories of their environment-friendly vehicles.

The commencement date for the purposes of section 16I of the Inland Revenue Ordinance in relation to environment-friendly vehicles is 18 June 2010.

The tax deduction is not limited to environment-friendly vehicles purchased on or after 18 June 2010. Eligible environment-friendly vehicles already in use by a business before 18 June 2010 are also eligible for the deduction. The reducing value of the eligible vehicles under the depreciation allowance regime will be treated as specified capital expenditure for which deduction will be given accordingly.

According to section 16K of the Inland Revenue Ordinance, a taxpayer shall make an election in writing and lodge it within one month after the date of the relevant notice of assessment. If the taxpayer makes such an election in his/her Tax Return, the Department would consider it when raising the assessment.

Yes, buyers of second-hand vehicles are entitled to the tax deduction as long as the vehicle is an eligible environment-friendly vehicle at the time of purchase.

No, vehicles acquired under "hire-purchase" arrangements are not eligible for the tax deduction. Taxpayers acquiring the eligible environment-friendly vehicles under hire-purchase arrangements are still entitled to the usual depreciation allowances.

For eligible environment-friendly vehicles, full deduction of cost will be allowed in the year of purchase. This is the same as the full deduction of capital expenditure presently allowed for "prescribed fixed assets" (which are mainly manufacturing and computer equipments) and "environmental protection machinery".

Under the depreciation allowance regime, taxpayers purchasing a motor vehicle are entitled to a total of 72% of the capital expenditure as deduction of depreciation allowance in the first year of its purchase. Starting from the second year onwards, taxpayers will be granted annual allowances at the rate of 30% of the reducing value for that vehicle. Under the new tax deduction, the tax deduction provided to a taxpayer in the first year of purchase of an eligible environment-friendly vehicle will be increased from 72% to 100% of the capital expenditure. Thus, the deduction of cost is accelerated.

Where an eligible environment-friendly vehicle is only used partly in the production of chargeable profits, the tax deduction shall be adjusted proportionately to the extent to which the vehicle is used in the production of chargeable profits.

If a taxpayer ceases its operation, whether permanently or temporarily, the vehicle concerned should be taken as being sold immediately before the cessation of operation and the taxpayer shall be chargeable to tax as if it had received the sale proceeds. If the environment-friendly vehicle is sold, destroyed or stolen within 12 months from the date of cessation of operation, the taxpayer may apply for an adjustment to the sale proceeds so as to reflect the actual sales income, insurance moneys and other compensation.

Yes, a taxpayer can choose to claim depreciation allowances in respect of a newly acquired environment-friendly vehicle. In such a case, the 100% deduction will not be allowed for the same environment-friendly vehicle in the first year of purchase.