This is a thought leadership article by Asia Pacific member Aoba discussing the 2021/2022 Hong Kong budget. 

On 24th February, 2021, Mr. Paul M Chan, the Financial Secretary of Hong Kong, delivered his fifth budget speech at the Legislative Council.

The worldwide outbreak of Coronavirus pandemic in 2020 has caused a number of cities to be locked down, numerous companies has halted production and the global economy has taken a hard hit.  In Hong Kong, it has recorded over 10,000 COVID-19 cases as of January 2021 and the local economy has also deteriorated.  Following the first GDP real growth decline in a decade in 2019, the GDP real growth fell aggressively to -6.1% in 2020 as a whole.  However, Hong Kong has shown a visible economic recovery in the third quarter of 2020 when the third wave of local infections was contained.  Without any abrupt worsening in the local epidemic situation or global economic activity, the local economy is expected to improve gradually. 

Cessation of businesses and halted production due to the epidemic has led to a high seasonally adjusted unemployment rate of 7%, compared to 3.4% in 2019.  In particular, the unemployment rates of the consumption- and tourism-related sectors went up to the highest since SARS in 2003, the last severe epidemic in Hong Kong.  The underlying consumer price inflation has significantly decreased from 3.0% for 2019 to 1.3% for 2020 as a result of weak economic conditions and threat of the epidemic.  The global and local economy remain under pressure due to the volatile pandemic.

The budget deficit of 2020/21 is HKD257.6 billion, which is HKD118.5 billion more than the original estimated budget deficit of HKD139.1 billion and this is the second consecutive year for the Hong Kong Government to run a fiscal deficit.  To maintain fiscal prudence and financial stability, the Government will adopt financial measures to promote economic development, continue to support enterprises and safeguard jobs, improve people’s livelihood, enhance public services and invest for our future. As such, the budget has proposed the following relief measures:-


Proposed fiscal/ tax measures


Reduce profits tax for 2020/21 by 100 percent, subject to a ceiling of HKD10,000


Reduce salaries tax and tax under personal assessment for 2020/21 by 100 percent, subject to a ceiling of HKD10,000


Waive rates for residential properties for four quarters of 2021/22, subject to a ceiling of HKD1,500 per quarter in first two quarters and HKD1,000 per quarter in remaining two quarters


Waive rates for non-residential properties for four quarters of 2021/22, subject to a ceiling of HKD5,000 per quarter in the first two quarters and HKD2,000 per quarter in the remaining two quarters


Waive the business registration fees for 2021/22


Waive 75 percent of water and sewage charges payable by non-domestic households for eight extra months, subject to a monthly cap of HKD20,000 and HKD12,500 respectively per household


Issue HKD5,000 electronic consumption vouchers in instalments to each eligible Hong Kong permanent resident and new arrival aged 18 or above


Set up a special 100% loan guarantee for individuals with a ceiling of HKD80,000 with maximum repayment period of 5 years


Propose to raise the rate of Stamp Duty on Stock Transfers, from the current 0.1% to 0.13% of the consideration or value of each transaction payable by buyers and sellers respectively

Policies for long-term development


Earmark a total of HKD934 million to enhance tourism resources, of which HKD169 million will be used to continue to take forward local cultural, heritage and creative tourism projects


Strive for the launch of Southbound Trading of Bond Connect within this year, and enhance the efficiency and capacity of the domestic Central Moneymarkets Unit


Allocate HKD375 million to Hong Kong Trade Development Council for developing virtual platforms to enhance its capability to organize online activities and to proceed with digitalization

Introduction to profits tax treatment for HKFRS 16 – Leases 

With the adoption of the Hong Kong Financial Reporting Standard (“HKFRS”) 16 – Leases which sets out the principles for the recognition, measurement, presentation and disclosure of leases with effect from annual reporting periods beginning on or after 1st January, 2019, the Inland Revenue Department (“the IRD”) released a guideline on 17th September, 2020 explaining its assessing practice.

Brief introduction to HKFRS 16

HKFRS 16 does not bring about substantial change in accounting treatment for lessors, thus profits tax treatment for lessors remains unchanged.  On the other hand, a new single accounting model is introduced for lessee accounting by HKFRS 16 that, no matter it is under operating lease or finance lease, a lessee is required to recognize asset (i.e. Right-of-use asset (“ROU asset”)) and liability (i.e. Lease liability) arising from the commitments in the lease arrangement, with optional exemption for short-term lease under 12 months and lease of low-value asset.  For example, under HKFRS 16, rental of office or staff quarter is also considered as a lease and a lessee is required to recognize ROU asset and lease liability for the tenancy agreement.  As a result, the rental expense previously reported is to be replaced by depreciation of ROU asset and interest expense on lease liability in the lessee’s income statement.

Tax treatment for HKFRS 16

The lease payments are previously treated as deductible expenses if the lease payments are incurred in the production of assessable profits.  However, under the application of HKFRS 16, no lease payment expenses are shown in the income statement while depreciation of ROU asset and interest expense on lease liability are recognized instead.  The IRD has suggested 2 practices to tackle this situation while taxpayers can choose either practices in their profits tax computation:-

Practice 1: Treating the depreciation on ROU assets and interest on lease liabilities as non-deductible and treat the actual lease payment expense as deductible instead; or

Practice 2: Treating the depreciation on ROU assets and interest on lease liabilities as deductible.

Explanation to Practice 1:-

Practice 1 follows the consistent practice that treating the lease payment expenses as deductible.  As such, it should be easily understandable to the taxpayers. 

Explanation to Practice 2:-

General situation 

For practice 2, as the sum of the depreciation on ROU assets and imputed interest on lease liabilities along the lease term will eventually be the same as the total lease payments actually paid, the IRD is of the view that it is also feasible for the taxpayer to treat the depreciation on ROU assets and interest on lease liabilities as deductible on the basis that the amounts are revenue in nature with only a timing difference, and that there is no element of tax avoidance.

Impairment loss

Under HKFRS 16, in the event the ability to derive benefit from the ROU asset is adversely affected, an impairment loss of the leased asset is required to be recognized in the profit and loss account, with a corresponding reduction in the carrying amount of the ROU asset.  As a result, depreciation on ROU asset would also be reduced in subsequent years.  To approximate the tax effect of the reduction of the original carrying amount, the IRD allows for deduction of the impairment loss to be spread over the remaining term of the lease on a straight-line basis.  Similarly, subject to that the asset value after reversal would not exceed the original carrying amount, any subsequent reversal of the impairment loss would be spread over the remaining term of the lease on a straight-line basis and included in tax assessment. 

Sub-leased asset accounted for under Fair Value Model

In the case of a lease and sub-lease arrangement, HKFRS 16 requires the sub-lessor to account for the head lease and sub-lease as separate contracts.  If the ROU asset in the head lease is defined as an investment property, the fair value model in HKAS 40 – Investment Properties should be adopted.  Under such fair value model, the ROU asset would be recognized at its market value at each year-end in the lease period and the change in fair value would be charged to the profit and loss account yearly.  However, such change in fair value has no profits tax effect as the profit or loss computed is unrealized.

As there would be no accounting depreciation recognized in the head lease under fair value model, while the fair value gain or loss is not taxable or deductible, and yet the lease income for the sub-lease is still taxable, it would be unfair to the taxpayer.  As such, the IRD will accept the amount of the ROU asset as initially recognized to be spread over on a straight-line basis over the term of the head lease for tax deduction purpose so as to approximate the rental expense actually incurred.


As the tax effect for the application of the HKFRS 16 may be significant, companies should consult your tax advisors and review your lease contracts to evaluate which practice should you choose for the preparation of the Profits Tax Computation.  Once either of the above practices is chosen, it would be difficult for the company to change to another practice as the IRD would expect the basis to be consistently applied and with no indication of any element of tax avoidance.  As such, if the company changes the practice, it is very likely that the IRD will issue query to confirm about the reason for changing the practice and to request the details of the lease contract.

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Aoba CPA Limited

Our company was established in 1989 when Hong Kong was still a British colony. As Hong Kong became a significant part of China, the company grew together with the changing economy. Today, China has become the second largest economic entity in the World. We find ourselves woven deeper and deeper into the business fabric of Mainland China.

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