Hong Kong Depreciation

The 60% Initial Allowance: Front-Loading Deductions in Year One

Hong Kong's Inland Revenue Ordinance (IRO) Part IV Division 1 provides one of Asia's most generous initial depreciation structures. When a business acquires qualifying plant or machinery, it claims a 60% initial allowance in the year of acquisition, reducing its tax base substantially from the outset. The remaining 40% of cost enters the relevant annual allowance pool. For a mid-size trading company purchasing HK$2 million of warehouse automation equipment, the first-year deduction is HK$1.2 million, generating approximately HK$198,000 in Profits Tax savings at the standard 16.5% rate — before any annual allowance on the remaining balance. Assets in the 30% annual allowance class (computers, motor vehicles) lose their pool value fastest: after the 60% initial allowance, the remaining 40% faces 30% reducing-balance each year, meaning roughly 72% of the cost is deducted by end of year two. This front-loading benefit is a key reason Hong Kong remains attractive for capital-intensive businesses seeking to minimise their effective tax rate in early operations.

Three Pools, Three Rates: The Annual Allowance Structure

After the initial allowance year, residual value is assigned to one of three annual allowance pools based on asset type. The 10% pool covers assets with long economic lives such as heavy generators and large industrial machinery. The 20% pool handles standard office and industrial equipment — furniture, air conditioning systems, and general machinery. The 30% pool is reserved for shorter-lived assets: computers, office automation equipment, and motor vehicles. The IRD does not publish individual life tables; pool assignment drives everything. A business must correctly classify each asset at acquisition, as reclassification after an audit assessment can create back-payments with interest and potential penalties for incorrect returns.

Commercial Building Allowances and Inherited Write-Off Periods

Buildings follow separate rules outside the plant and machinery pool system. Commercial buildings and structures qualify for an annual allowance of 4% of construction cost on a straight-line basis over 25 years. Industrial buildings may claim a 20% initial allowance plus 4% annual allowance. Importantly, the allowance runs with the building, not the owner — a purchaser of a used commercial building steps into the remaining write-off period of the previous owner based on the original construction cost. This inherited allowance pool is a material consideration in Hong Kong property transactions, where the remaining deductible balance can influence negotiated purchase prices, particularly between connected parties subject to transfer pricing scrutiny under the post-2019 transfer pricing rules introduced by the Inland Revenue (Amendment) (No. 6) Ordinance.