HK plans to boost tax benefits for IP businesses: Chan

HK plans to boost tax benefits for IP businesses: Chan

Hong Kong Plans to Enhance Tax Benefits for Intellectual Property Businesses
In a move to strengthen its position as a global hub for innovation, Hong Kong’s Financial Secretary, Paul Chan, announced new measures to expand tax incentives for intellectual property (IP)-related businesses. These initiatives, outlined in the 2026 budget and recent government consultations, aim to reduce the tax burden on IP income while fostering a competitive environment for technology and creative industries.

A key component of the strategy is the patent box regime, introduced in 2024 under the Inland Revenue (Amendment) (Tax Concessions for Intellectual Property Income) Ordinance. This regime allows eligible IP income—such as royalties, licensing fees, and gains from the sale of patents, copyrighted software, or plant-variety rights—to be taxed at a concessionary rate of 5%, significantly lower than Hong Kong's standard corporate tax rate of 16.5%. To qualify, businesses must demonstrate a "nexus" between their IP income and qualifying R&D expenditures. The nexus ratio, calculated as eligible R&D costs divided by total development costs, determines the portion of profits eligible for the reduced rate.

The government has also proposed enhanced tax deductions for IP-related expenditures. These include allowing deductions for upfront licensing fees and acquisition costs of IP purchased from associates, subject to anti-abuse measures such as transfer pricing rules and third-party valuation requirements for transactions exceeding HK$3 million. Additionally, a transitional measure permits companies to use a three-year rolling average for calculating R&D fractions, easing compliance during the regime's early implementation.

Complementing these tax incentives, the 2026 budget allocates funding for an Intellectual Property Academy, to be co-established by the IP Department and Vocational Training Council. The academy will train professionals in IP management, licensing, and financing, addressing a skills gap in sectors like tech startups and creative industries.

These measures reflect Hong Kong's alignment with OECD guidelines under BEPS Action 5, ensuring compliance with international standards while promoting local innovation. Businesses are encouraged to review their IP structures and R&D strategies to optimize eligibility under the new framework.

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