Retailers to benefit from reinstatement cost write-off

The tax relief is welcome, but costs would still dictate the decision to move.

Retailers that often have to relocate, upsize or downsize leased spaces are set to benefit from a Hong Kong measure that lets lessees deduct reinstatement costs from their taxable income.

“There are many operators and businesses in Hong Kong that are on leases and there tends to be a fair amount of movement in the leases in the retail and commercial spaces,” Timothy Loh, founder and managing partner at law firm Timothy Loh LLP, told Hong Kong Business.

“Operators of retail shops, perhaps medium-sized enterprises, will definitely get the most benefit from the tax relief under this amendment,” he added.

Leasing volume in Hong Kong’s retail segment reached 1.1 million square feet in 2024, according to CBRE Group, Inc. data.

Carol Lam, director and head of tax at BDO Hong Kong, noted that retail outlets such as restaurants often relocate when market conditions fluctuate, which means they have to bear reinstatement costs — the amount needed to restore a rented property to its original condition at the end of a lease.

The average reinstatement cost in Hong Kong was $194 (US$25) per square foot as of November 2023, according to estimates by SAVVI Limited, an off-market office rental platform.

Lam cited the need for documentation so retail outlets in Hong Kong, whose number stood at 63,754 in September 2024 based on data from the Census and Statistics Department, would be eligible for the tax relief.

“They may need to keep documentation such as invoices, and bank statements,” he said. “They may also have the contractors provide them with the quotation with a breakdown.”

Loh said companies must prove that they have “an actual legally binding reinstatement obligation and that the costs incurred are reasonable.”

Meanwhile, Lo expects buyers to benefit from another change introduced by the Inland Revenue Department that allows them to claim a depreciation allowance on the full purchase price of old commercial and industrial buildings, even if the so-called usage period has expired.

Before, buyers could only claim depreciation on the remaining value of the property with a remaining usage period.

For example, if someone buys a building built in 2014 for $1m in 2024, with a 50-year usage period, and the seller has claimed $400,000 in depreciation over 10 years, the buyer could only claim depreciation on the remaining $600,000.

With the amendment, buyers can now claim a depreciation allowance on the full purchase price of the property until the entire amount is claimed, even if the usage period has expired.

Loh said this change addresses the issue of fairness whilst also encouraging deals involving old buildings. “Buyers of older buildings can now benefit from depreciation allowances, which they otherwise might not have been able to claim.”

Despite the incentives, both Loh and Lam do not expect major movement in the real estate market.

“I don't think the main driver for someone moving premises is the tax benefit,” Loh said. “The main driver is still the cost. So, I don't see this causing a significant amount of additional movement in the marketplace.”

“It's a nice incentive to have, and it might be a small factor, but no one's going to move just because of a tax deduction,” he added.