Tax Deductions for Leased Premises Reinstatement and Allowances for Buildings and Structures

The contents of this page are based on the Inland Revenue (Amendment) (Tax Deductions for Leased Premises Reinstatement and Allowances for Buildings and Structures) Bill 2024 which is subject to scrutiny by the Legislative Council. Readers are reminded to be alerted to the latest development upon enactment of the Bill.

The Financial Secretary announced in the 2024-25 Budget that the Government would introduce a tax deduction for expenses incurred for reinstating the condition of premises under a lease to their original condition (reinstatement costs), and remove the time limit for claiming annual allowances in respect of a commercial or industrial building or structure starting from the year of assessment (YA) 2024/25.

The Inland Revenue (Amendment) (Tax Deductions for Leased Premises Reinstatement and Allowances for Buildings and Structures) Bill 2024 (the Amendment Bill) was gazetted on 18 October 2024 to give effect to the two proposals.

More information on the Amendment Bill

Tax deduction for reinstatement costs

Section 17(1)(c) of the Inland Revenue Ordinance (Cap. 112) (IRO) provides that any expenditure of a capital nature shall not be deducted for the purpose of ascertaining profits in respect of which a person is chargeable to profits tax. Generally, a lease that confers an exclusive possession of a property is a capital asset, and any cost incurred for its acquisition (including reinstatement costs) is also of a capital nature. Hence, reinstatement costs are currently precluded from profits tax deduction.

It is common for enterprises to lease premises (such as office or shop) to carry out their businesses in Hong Kong, and they are generally required to reinstate the premises at the end of or on an early termination of the lease. Therefore, reinstatement costs are incurred whenever enterprises need to relocate, upsize or downsize their operating sites. The 2024-25 Budget proposed allowing tax deduction for reinstatement costs despite their capital nature so as to relieve the tax burden of enterprises.

Having balanced the need for a wide scope of application of the proposed tax deduction and the risk of abusive claims, tax deduction for reinstatement costs will be allowed to a person if all of the following conditions are met:

(a)	the reinstatement costs have been actually incurred by the person;
(b)	the person claiming the deduction is a lessee of the lease;
(c)	the person claiming the deduction has an obligation (whether express or implied, and whether arising from the lease or from another agreement between the lessor and lessee of the lease) to reinstate, or pay (whether in full or in part) for the reinstatement of, the premises under the lease to their original condition at the end of the lease term, or on an early termination of the lease;
(d)	the reinstatement costs do not relate to any provisions made under Hong Kong Financial Reporting Standard 16 (Leases) as issued by the Hong Kong Institute of Certified Public Accountants and in force from time to time, or any other similar accounting standards. In other words, any accounting provisions recognizing reinstatement costs as part of the right-of-use asset or the amortization of such provisions is not eligible for deduction; and
(e)	the amount of the reinstatement costs claimed is reasonable in the circumstances.

The proposed tax deduction will apply to a YA beginning on or after 1 April 2024.

FAQ on tax deduction for reinstatement costs

Annual allowances for commercial or industrial buildings or structures

Under the IRO, a taxpayer who is entitled to the relevant interest in relation to the capital expenditure incurred on the construction of a commercial or industrial building or structure may claim an annual allowance of 4% on the expenditure or a fraction of the residue of expenditure (as the case may be). If certain event (i.e. sale, demolition or cessation of use) occurs in relation to the building or structure in any YA, the assessable profits of the taxpayer for that YA will be adjusted by making a balancing charge or allowance (collectively referred to as “balancing adjustment”).

Currently, claims for annual allowances for a commercial or industrial building or structure are subject to a maximum limit of 25 years or 50 years starting from the YA in which the building or structure was first used (usage period). If a commercial or industrial building or structure is sold before the end of the usage period, the seller will be subject to a balancing adjustment whilst the buyer will be able to claim annual allowances based on the residue of expenditure immediately after the sale over the remaining years within the usage period. However, if the building or structure is sold after the end of the usage period, the seller will still be subject to a balancing adjustment (which will have the effect of recouping the allowances previously granted if the adjustment is a balancing charge), but the buyer will not be entitled to claim any annual allowance because the usage period has expired when the buyer purchases the commercial or industrial building or structure.

The time limit for claiming annual allowances results in disparity of tax treatment for the buyers of commercial or industrial buildings or structures who incurred the same amount of capital expenditure before and after the end of the usage period. In the long run, such disparity may discourage buyers from purchasing old or second-hand buildings or structures. To foster a business-friendly environment, the Financial Secretary announced in the 2024-25 Budget that the Government will amend the IRO to remove the time limit for claiming annual allowances in respect of a commercial or industrial building or structure starting from the YA 2024/25 to the effect as follows–

(a)	if a commercial or industrial building or structure (with an unexpired usage period) is acquired and used by the buyer in the basis period for a YA before the YA 2024/25, the buyer is entitled to an annual allowance which is calculated in the same manner in accordance with the existing provisions of the IRO;
(b)	if—
	(i)	a taxpayer acquired an industrial building or structure before the commencement of the basis period for the YA 2024/25 but was not granted any annual allowance because the usage period had expired at the time of acquiring the building or structure; or
	(ii)	a commercial or industrial building or structure (whether the usage period has expired) is acquired and used by the buyer in the basis period for a YA beginning on or after 1 April 2024,
	an annual allowance of 4% on the residue of expenditure immediately after the sale will be granted to the buyer starting from the YA 2024/25 onwards, until the residue of expenditure immediately after the sale has been fully claimed; and
(c)	in any of the cases referred to in paragraphs (a) and (b), the seller will continue to be subject to a balancing adjustment in accordance with the existing provisions of the IRO.