In this course · 5 of 7
Course 4
Keep your books monthly
7 lessons · 7 min
- 1How often should a Hong Kong company update its books?
- 2How to Record Accounts Receivable and Payable in Hong Kong
- 3Bank Reconciliation: Why Hong Kong Businesses Should Do It Monthly
- 4How to Account for Fixed Assets and Depreciation in Hong Kong
- 5Accounting Depreciation vs Tax Allowances in Hong Kong
- 6How to Account for Inventory and Stocktake in Hong Kong
- 7What are management accounts, and does a Hong Kong SME need them?
The short answer
Accounting depreciation is the charge in your financial statements. Tax allowances are the Inland Revenue Department's own scheme for relief on capital spending, calculated on different rules (rates per the IRD Brief Guide to Taxes 2025/26). Depreciation charged in the accounts is added back when profits tax is computed, then allowances are claimed instead.
Accounting depreciation follows the accounting standard and company policy: cost spread across useful life, by the method you choose.
Depreciation allowances are statutory tax relief under the Inland Revenue Ordinance. The IRD's Brief Guide to Taxes 2025/26 describes them as follows:
| Asset | Initial allowance | Annual allowance |
|---|---|---|
| Plant and machinery | 60% of cost | 10%, 20% or 30% of the reducing value, by estimated working life, assets pooled by rate |
| Industrial buildings | 20% | 4% a year |
| Commercial buildings | none | 4% a year on construction cost |
A balancing allowance or charge arises on disposal or cessation. Capital expenditure on specified environmental protection facilities (machinery, installations that form part of a building, and environment-friendly vehicles) qualifies for a 100% deduction. Other special incentives exist.
How they meet. Accounting depreciation is not itself deductible for profits tax. The tax computation adds it back and substitutes the allowances. So the figures usually differ, and the difference is tracked in the tax computation, not in the bookkeeping.
For the bookkeeper: record depreciation for the accounts; keep the cost, date and nature of each asset so the tax adviser can compute allowances. Ask your tax adviser to prepare the profits tax computation.
Check current rates and conditions with the IRD (the rates above are those in the 2025/26 guide), because incentives and rules change.
Legal basis and sources
The law
- Inland Revenue Ordinance (Cap. 112), Part 6
General information for business owners, not legal, tax or professional advice. Rules change, so check the sources or ask a licensed professional before you act.
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