Hong Kong: Profits tax implications on sales of commercial buildings
Treatment of allowances of construction costs of a commercial building on sale of building
Treatment of allowances of construction costs of a commercial building on sale of building
Under the existing tax depreciation regime for commercial buildings—i.e., commercial building allowances—in Hong Kong, asymmetric profits tax treatments may arise when a commercial building that has been in use for more than 25 years is sold. In this situation, the seller is subject to a claw-back of the commercial building allowances previously granted, but the buyer is unable to claim any commercial building allowances on the construction cost of the building as the new owner.
This issue is becoming more pressing as the end of the reset 25-year period for those commercial buildings put in use prior to year of assessment (YOA) 1998/1999 is fast approaching (YOA 2023/2024).
Existing regime
Under the current commercial building allowances regime, annual allowances at 4% of the construction costs of a commercial building are granted to Hong Kong taxpayers as a tax relief for the construction costs incurred. The annual allowances can be claimed by taxpayers over a maximum period of 25 years starting from the YOA in which the building was first used or YOA 1998/1999 (for commercial buildings constructed prior to YOA 1998/1999).
When a taxpayer subsequently sells a commercial building and the amount of consideration received by the taxpayer is greater than the tax residual value of the building immediately before the sale, the excess is taxable as a balancing charge, subject to a cap of the total commercial building allowances previously granted. The balancing charge effectively represents a claw-back of the commercial building allowances previously allowed to the taxpayer.
Correspondingly, the buyer can claim commercial building allowances on the tax residual value plus any balancing charge in respect of the building acquired for the remaining year(s) (if any) within the 25-year period. However, no commercial building allowances would be granted to the buyer if the commercial building has been put in use for more than 25 years—that is when the 25-year period has expired.
Property owners and investors will need to fact this issue into their investment modelling going forwards.
KPMG observation
Tax professionals believe that this issue could largely be addressed if it is agreed that the Inland Revenue Department accepts that the majority of the sale proceeds represents an appreciation of the land value and only a small portion of the proceeds is attributable to the building. However, the tax authority does not in practice accept this position.
A similar issue also arises for aged industrial buildings in Hong Kong because under the existing industrial building allowances regime, there is also a 25-year time limit for claiming industrial building allowances on industrial buildings. However, because there are fewer industrial buildings than commercial buildings in Hong Kong, the magnitude of the issue and the impact on taxpayers may not be as significant as in the case of commercial buildings.
For more information, contact a KPMG tax professional:
David Ling | davidxling@kpmg.com
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