A Beginner’s Guide to Depreciation Allowances in Hong Kong Profits Tax 2026

When running a business in Hong Kong, you will likely purchase assets such as office equipment, vehicles, computers, or even business premises. These items are necessary for operations — but from a tax perspective, they are considered capital expenses.

Under Hong Kong profits tax rules, capital expenses cannot be deducted in full like normal operating costs (e.g. rent or salaries). Instead, the government allows businesses to claim depreciation allowances, which spread the tax deduction over time.

This guide explains what depreciation allowances are, what assets qualify, and how they work in simple terms.

What Are Depreciation Allowances?

Depreciation allowances are tax deductions granted on fixed assets used to generate taxable business income.

In simple terms:

• You buy a business asset
• You cannot deduct the full cost immediately
• The Inland Revenue Department (IRD) allows you to claim deductions gradually — or sometimes fully — under specific rules

To qualify, the asset must generally:

• Be used to produce assessable profits
• Be owned by your business (special rules apply for hire purchase)

Types of Depreciation Allowances in Hong Kong

The amount you can claim depends on the type of asset you purchase.

1. Buildings Used for Business

If your company buys a property for business use, you may claim a building allowance.

There are two main types:

a) Commercial Building Allowance (CBA)

Applies to commercial premises such as offices or retail units.

• 4% of the construction cost can be claimed each year.

b) Industrial Building Allowance (IBA)

Applies to factories and certain industrial premises.

• 20% initial allowance in the year the cost is incurred
• 4% annual allowance thereafter

If the building is purchased second-hand, the calculation method will differ based on the remaining qualifying value.

2. Plant and Machinery (Most Business Equipment)

Most business assets fall into this category, including:

• Office furniture
• Equipment
• Motor vehicles
• Machinery

Hong Kong uses a pool system, which groups assets based on depreciation rates.

Step 1: Initial Allowance

You can claim 60% of the purchase cost in the first year.

Step 2: Annual Allowance

After deducting the 60%, the remaining value is reduced each year at:

• 10%
• 20%
• 30%

The applicable rate depends on the type of asset. For example:

• Motor vehicles usually fall under the 30% pool
• Office equipment may fall under 10%, 20%, or 30%

3. Assets Eligible for 100% Immediate Deduction

Some assets qualify for a full tax deduction in the year of purchase.

These may include:

• Computer hardware
• Computer software
• Manufacturing machinery
• Certain environmental protection equipment

This allows businesses to reduce taxable profits immediately.

What Happens When You Sell the Asset?

If you dispose of an asset, there may be tax consequences.

Two situations may arise:

✅ Balancing Charge

If you sell the asset for more than its tax written down value, the excess may become taxable income.

✅ Balancing Allowance

If you sell the asset for less than its remaining tax value, you may claim an additional deduction.

This is an area where many businesses overlook potential tax adjustments.

Special Situations to Be Aware Of

a) Hire Purchase Assets

If you buy an asset under a hire purchase agreement, allowances are usually based on the capital portion of repayments.

b) Intangible Assets

Certain intangible assets such as patents and trademarks may qualify for tax deductions under separate rules.

Research and development (R&D) expenses may also qualify for enhanced tax deductions.

c) Private Use

If an asset is partly used for non-business purposes, you must reduce your claim proportionally.

Why Depreciation Planning Matters

Although depreciation allowances may seem technical, they directly affect:

• Your company’s taxable profits
• Cash flow timing
• Investment decisions
• Tax exposure when disposing of assets

Proper classification and timing of asset purchases can improve overall tax efficiency.

If your business is investing in high-value equipment or property, it is advisable to review the tax treatment in advance to avoid unexpected balancing charges or missed deductions.

iBlynq is here to help

Depreciation rules may seem straightforward, but incorrect classification, missed claims, or overlooked balancing charges can lead to unnecessary tax payments 

Whether you are a startup, SME, or established corporation, we provide practical and commercially focused tax advice tailored to your business.

📩 Contact us today for a consultation and ensure your depreciation claims are accurate, compliant, and tax-efficient.