Upcoming Mallesons seminarsCompanies that have incurred or will incur capital expenditure on environmental protection facilities in Hong Kong and those that will purchase and use environmental protection machinery in China.
What do you need to do?Consider potential tax benefit entitlements for the machinery or plant you have acquired, or plan to acquire.
Christopher Tung
(董彥華)
Partner
T +852 3443 1082
Beijing
John Shi
(史衛)
Sydney
Dominic Bortoluzzi
Melbourne
Louis Chiam
To encourage the business community to protect the environment, the Financial Secretary of Hong Kong proposed accelerated tax deductions for capital expenditure incurred on environment-friendly facilities in his 2008/09 Budget Speech.
The Revenue Ordinance 2008 which gives effect to the proposal was passed on 26 June 2008. The relevant tax concession provisions in the Revenue Ordinance 2008 were added to the Inland Revenue Ordinance (Cap 112) and they came into operation on 27 June 2008 ( “Tax Concession Laws”).
Who benefits from the Tax Concession Laws?
Starting from the year of assessment 2008/09, you will be entitled to a tax concession if you incurred capital expenditure on environmental protection machinery or installation (collectively “environmental protection facilities” ).
Environmental protection facilities already in use before commencement of the Tax Concession Laws are also eligible for the tax deduction. The residue value or residue expenditure of the facilities under the depreciation allowance regime will be treated as capital expenditure and be deducted accordingly. However, for environmental protection facilities which have not met the applicable registration or compliance requirements set out in the Tax Concession Laws, the tax concession will be deferred until such requirements are met.
The tax concession does not extend to lessees of machinery or plants.
Environmental protection machinery
Eligible environmental protection machinery will receive a 100% deduction of the cost from the year of assessment instead of 60% of the cost as previously the case.
The eligible environmental protection machinery currently on the list includes the following:
- low noise construction machinery or plant registered under the Quality Powered Mechanical Equipment system administered by the Environmental Protection Department
- air pollution control machinery or plant in compliance with the requirements under the Air Pollution Control Ordinance (Cap 311)
- waste treatment machinery or plant in compliance with the requirements under the Waste Disposal Ordinance (Cap 354), and
- wastewater treatment machinery or plant in compliance with the requirements under the Water Pollution Control Ordinance (Cap 358).
Environmental protection installation
Eligible environmental protection installations will now receive an accelerated rate of 20% deduction of cost for five consecutive years. This concession shortens the write-off period from 4% per year over 25 years to 20% per year over 5 years.
The list of eligible environmental protection installations currently includes energy efficient building installations registered under the Hong Kong Energy Efficiency Registration Scheme for Buildings administered by the Electrical Mechanical Services Department and the following installations:
- solar water heating installations
- solar photovoltaic installations
- wind turbine installations
- offshore wind farm installations
- landfill gas installations
- anaerobic digestion installations
- thermal waste treatment installations
- wave power installations
- hydroelectric installations
- bio-fuel installations
- biomass combined-heat-and-power installations, and
- geothermal installations.
Proportionality
If an environmental protection facility is only partly used in the production of profits, the amount of deductible tax will be calculated proportionally.
Sales of the environmental protection facilities
If you subsequently sell environmental protection machinery, profit tax is chargeable on the proceeds of sale up to the amount of deduction previously claimed.
Similarly, if you subsequently sell an environmental protection installation, and the proceeds of sale exceeds the tax residual value (the cost of the installation minus the amount deducted), you need to pay profit tax on the difference, up to the tax deduction previously claimed. However, if the tax residual value exceeds the proceeds of sale, the difference is profit tax deductible.
Please refer to the following table for calculation of amount taxable/ deductible in different situations:
Amount taxable/deductible | |
Sale of environmental protection machinery |
Proceeds of sale ≤ Deduction previously claimed Taxable amount = Proceeds of sale |
Proceeds of sale > Deduction previously claimed Taxable amount = Deduction previously claimed | |
Sale of environmental protection installation |
Proceeds of sale > Tax residual value AND Proceeds of sale ≤ Deduction previously claimed Taxable amount = Proceeds of sale - tax residual value |
Proceeds of sale > Tax residual value AND Proceeds of sale > Deduction previously claimed Taxable amount = Deduction previously claimed | |
If the installation has no tax residual value Taxable amount = Proceeds of sale (up to the deduction previously claimed) | |
Proceeds of sale < Tax residual value Tax deductible amount = Tax residual value - proceed of sale |
Conclusion
The enactment of the Tax Concession Laws is a positive step taken by the Hong Kong government to protect the deteriorating environment. Though the effect of the new laws is yet to be seen, one can be optimistic that businesses in Hong Kong will be motivated to use more environmentally friendly facilities.
Disclaimer
This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.
Authors
Marc Jaku, Solicitor
Tracy Chan, Legal Assistant
The Ministry of Finance (“MOF”) and State Administration for Taxation (“SAT”) issued a notice on 23 September 2008 to address the implementation of the List of Preferential Enterprise Income Tax for Environmental Protection Machinery (“the List”) released by MOF, SAT and the National Development and Reform Commission.
The purpose of this article is to draw your attention to the new tax benefits to which you may be eligible.
Who benefits from the Tax Concession Laws?
Enterprises which purchase and use machinery subject to the List from 1 January 2008 will be entitled to a tax concession.
If the eligible machinery is assigned or transferred within five tax years of its purchase, the tax concession will be suspended from the date the machinery is not practically used, and such enterprises shall pay off the deducted income tax. The assignee or transferee may still enjoy the tax concession for the purchase of the machinery.
If the tax amount in a given year is less than the amount to be deducted, the deduction amount can be carried forward to the next five tax years.
Environmental protection machinery
Investment in eligible environmental protection machinery will be entitled to a 10% deduction of the income tax amount that would have been paid for it in a tax year.
The eligible environmental protection machinery currently on the List includes the following:-
- wastewater treatment machinery;
- air pollution control machinery;
- solid waste treatment machinery;
- environmental supervision instruments; and
- clean production machinery.
Conclusion
The enactment of the List and this new tax concession demonstrates the progress that China has made following the Enterprise Income Tax Law, which provided for incentives to be given to environmentally-friendly enterprises and encourage other enterprises to invest in the sector and ultimately help protect the environment. Though the effect of the notice is yet to be seen, one may be optimistic that businesses in China will be motivated to use more environmentally friendly machinery.
Disclaimer
This publication is only a general outline. It is not legal advice. You should seek professional advice before taking any action based on its contents.
Authors
Marc Jaku, Solicitor
Joe Wang, Associate