Great news for Hong Kong old building investors – CBA still available for Purchase of 2nd hand properties first use before 1998/9
Removing 25-year Time Limits for CBA claim for 2nd hand properties
Current Regime:
Under the current tax regime, the Commercial Building Allowance (CBA) and Industrial Building Allowance (IBA) for immoveable property investment can be claimed for up to 25 years from the year the building is first put to use. If the property is sold before this 25-year period ends, the seller faces balancing adjustments, and the buyer can claim CBA on the remaining residual value.
However, if the property is sold after the 25-year usage period, the buyer is not entitled to any CBA. Additionally, the seller must repay any tax benefits received from previous CBA claims through balancing adjustments. For second-hand properties that were first used in or before the year of assessment 1998/99, the final year to claim CBA is the current year, 2023/24 (25th year after 1998/99).
As such, under the current regime, no CBA will be available for investors who purchase an old building first use before 1998/99 after 2023/24, which is not fair to the old building investors.
A key aspect of the Single Family Office (SFO) tax concession regime in Hong Kong is the emphasis on economic substance requirements and operating expenditures. These criteria are designed to ensure that SFOs and Family-Owned Investment Holding Vehicles (FIHVs) establish a substantial presence in Hong Kong, contributing to the local economy and adhering to global tax compliance standards.
Proposed Regime:
The government has proposed a significant reform to the CBA/IBA regime, which is set to take effect from the year of assessment 2024/25, pending Legislative Council approval.
CBA for Buyers: The allowance will be calculated at a rate of 4% annually, based on either the original cost of construction or the residue of expenditure immediately after the sale.
Continuous Claims: This 4% allowance can be claimed each year until the full amount of the construction cost or remaining expenditure has been utilized.
This change is designed to align with the expiration of the CBA usage period for the first group of taxpayers who began claiming the allowance in the 1998/99 assessment year. The proposal aims to remove the time limits that currently prevent buyers of second-hand properties from benefiting fully from CBA, thus ensuring a fairer and more consistent tax treatment.
The implementation of this proposal is subject to the passage of the necessary legislative amendments.
Points to note:
We welcome the new approach on CBA Claim proposed by the IRD. This issue has been a hot topic for various property investors these 2-3 years as they are unsure whether they can pursue CBA claim when they purchased a second-hand property in the year of assessment 2024/25 or after.
They would also impact investment group which wishes to do Hong Kong property restructuring. There are two different directions:-
1. Cost-saving direction: Transferring a number of properties from multiple entities into 1 single entity and close down the inactive entities after the transfer.
2. Tax-saving direction (Profits Tax + Stamp Duty): Transferring a number of properties in 1 single entity to one property per entity and then potentially enjoy 2-tier tax rate and saving in Stamp Duty for property transfer (Through the sale of company shares)
If the new company fails to pursue the CBA/IBA allowance claim, the aforementioned property restructuring will no longer be feasible from now on. Kindly note that when you perform property structuring, you should also have to make sure that Stamp Duty Section 45 and Section 27(5) Relief would be available to exempt the Stamp Duty.
Despite the good news, it is worthwhile that only cost of construction would be qualifying expenditure for CBA, instead of the purchase price of the 2nd-hand properties. It is a common mistake that many taxpayers to over-claim CBA. If you are planning to acquire a property holding company, please make sure to check the calculation in the due diligence exercise to avoid having to make up for the seller's underpaid taxes in prior years before the acquisition.
