Retailers who frequently move, expand, or downsize leased spaces in Hong Kong stand to benefit from a new tax relief measure that allows lessees to deduct reinstatement costs from their taxable income.
The relief, introduced as part of an amendment, is expected to particularly benefit operators of retail businesses, especially small and medium-sized enterprises (SMEs). Timothy Loh, founder and managing partner at law firm Timothy Loh LLP, noted that Hong Kong’s retail and commercial leasing market is dynamic, with frequent movement among leases. “Operators of retail shops, especially SMEs, will see the most benefit from this tax relief,” Loh explained in an interview with Hong Kong Business.
In 2024, leasing volume in Hong Kong’s retail segment reached 1.1 million square feet, according to data from CBRE Group, Inc.
Carol Lam, director and head of tax at BDO Hong Kong, highlighted that retail outlets such as restaurants often relocate in response to shifting market conditions. When they do, they face the challenge of paying reinstatement costs, which are expenses incurred to return a leased property to its original condition after a tenancy ends. As of November 2023, the average reinstatement cost in Hong Kong stood at HK$194 (US$25) per square foot, according to SAVVI Limited, a platform for off-market office rentals.
Lam emphasized the importance of proper documentation for businesses to be eligible for the tax relief. “Retail outlets will need to keep records such as invoices and bank statements,” she noted. “Contractors will also need to provide detailed quotations.”
To qualify for the tax deduction, companies must prove they have a legally binding reinstatement obligation and that the incurred costs are reasonable, according to Loh.
In addition to the reinstatement cost relief, the Inland Revenue Department has introduced a second change that could benefit buyers of commercial and industrial buildings. Previously, buyers could only claim depreciation on the remaining value of a property, based on its usage period. Now, they can claim depreciation on the full purchase price of the property, even if its usage period has expired.
For instance, if a buyer purchases a property for HK$1 million in 2024, and the seller has claimed HK$400,000 in depreciation over the last decade, the buyer could now claim depreciation on the entire HK$1 million, rather than just the remaining HK$600,000. Loh believes this amendment will encourage transactions involving older buildings by making depreciation claims fairer and more advantageous for buyers.
Despite these incentives, both Loh and Lam agree that the changes are unlikely to trigger significant shifts in the real estate market.
“The tax benefit alone is unlikely to be a primary motivator for companies to move premises,” Loh said. “The main driver will still be cost. I don’t foresee a dramatic increase in market activity due to these changes.” Lam echoed this sentiment, describing the tax relief as a “nice incentive” that may influence decisions but not serve as a major catalyst for relocation.
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