On 17 September 2020, the IRD published guidance on tax treatment of leases accounted for under Hong Kong Financial Reporting Standard (“HKFRS”) 16.

Upon the adoption of the HKFRS 16, lessee is required to recognize the right-of-use (“ROU”) asset and lease liability in its statement of financial position and recognize depreciation of ROU asset and interest expense on lease liability in its statement of profit or loss and other comprehensive income.

Under the guidance, lease expenditures could be deducted in one of the following two approaches:

• tax deduction in respect of the depreciation of ROU asset and interest expense on lease liability charged to the profit and loss account in accordance with HKFRS 16; or
• tax deduction in respect of the agreed contractual lease payments.

The above two approaches will eventually result in the same tax implications over the whole lease term, even though the total amount of depreciation of ROU and interest expense on lease liability may not equal the contractual lease payments for one particular year of assessment. It simply reflects a matter of timing difference. As such, both approaches will be accepted by the IRD.

POINTS TO NOTE
While many of us should be familiar with the basic tax treatments under HKFRS 16, we would like to draw your attention to the following complex situations:-

1	First Adoption of HKFRS16	Adjustments in Retained Earnings Carried Forward
2	Impairment loss on ROU asset	Deductible straight-line over the lease terms

Tax adjustments must be made in the above situations. Please feel free to contact us for the profits tax treatment tailor-made to your situations if you encounter the above situations.