When it comes to deducting the cost of purchasing a company car in Hong Kong, the approach you take can significantly impact your tax benefits. The Inland Revenue Department (IRD) has outlined specific rules and methods for these deductions, depending on how you make the purchase. Let's delve into this and explore some scenarios:
- Purchase in One Lump Sum
If you opt to buy the company car outright in a single payment, the tax deduction is calculated using the Pool Method outlined in Departmental Interpretation and Practice Notes No. 7 (DIPN 7). Here's how it works:
- Initial Allowance: In the first year, you can claim an allowance equal to 60% of the total value of the car.
-
Subsequent Years: From the second year onwards, you can claim a yearly deduction of 30% of the remaining value.
|
|
1st year |
2nd year |
3rd year |
And so on |
|
%Allowance |
|
|
|
… |
|
Initial Allowance |
60% of the total value |
|
|
… |
|
Yearly |
30 % of the remaining value |
30 % of the remaining value |
30 % of the remaining value |
… |
To illustrate, let's say the car costs 100,000.00 HK$. In the first year, your deduction would be calculated as follows: Deduction = 60% x 100,000.00 + 30% (100,000 - (60% x 100,000)) So, for the first year, your deduction amounts to 60,000 + 12,000 = 72,000 HK$.
In the second year, only 30% of the remaining value is deducted, and this continues for subsequent years.
- Purchase in Instalments
If you choose to pay for the company car in instalments, the tax deduction method remains the same as with the lump sum purchase, as per DIPN 7 - the Pool Method. Here's how it works:
- Bonus First Year: In the first year, you can claim an allowance equal to 60% of the total value paid during that year.
- Subsequent Years: From the second year onwards, you can claim a yearly deduction of 30% of the remaining value.
|
|
1st year |
2nd year |
3rd year |
And so on |
|
%Allowance |
|
|
|
… |
|
Bonus first year |
60% of the total value paid |
60% of the total value paid |
60% of the total value paid |
… |
|
yearly |
30 % of the remaining value |
30 % of the remaining value |
30 % of the remaining value |
… |
For instance, if the car costs 100,000.00 HK$ and you pay in 10 equal instalments of 10,000 per year, the calculation follows the same principles outlined earlier.
Additional Deduction for Prescribed Fixed Assets (PFA)
The IRD has an additional incentive: certain assets categorized as Prescribed Fixed Assets (PFA) can be deducted for the full 100% of their value. These assets include:
- Electricity generating plant.
- Land on which electricity generating plant is situated.
- Any other assets that have been or may be used in connection with the operation of such plants.
Conclusion
When considering the purchase of a company car in Hong Kong, understanding the tax implications based on your payment method is essential. It's also worth exploring if your vehicle falls under the PFA category, which can offer significant tax advantages.
Consult our tax professionals to ensure you make the most tax-efficient decisions for your business.