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Hong Kong Passes Legislation Extending Scope of tax deductions for capital expenditure incurred for purchase of ...
 
Date:  16 Jul 2018

Hong Kong Passes Legislation Extending Scope of tax deductions for capital expenditure incurred for purchase of intellectual property rights


The Inland Revenue (Amendment) (No. 5) Ordinance 2018 (the Amendment Ordinance) was gazetted and came into operation on June 29, 2018 to expand the scope of profits tax deductions for capital expenditure incurred by enterprises for the purchase of intellectual property rights (IPRs) from five types to eight with effect from the year of tax assessment 2018/19. This helps to encourage enterprises to engage in the development of IP trading business and promote Hong Kong as an IP trading hub in the Asia-Pacific region.

The additional three types of IPRs involved are (i) a performer’s economic right; (ii) a protected layout-design (topography) right; and (iii) a protected plant variety right. The original five types of IP rights for which profits tax deductions have already been provided for the capital expenditure incurred for their purchase are patents, know-how, copyright, registered designs and registered trade marks.

The Amendment Bill also expands the scope of tax deductions originally provided for the registration expenses for trade marks, designs and patents, to cover plant variety rights as well.


Key features of the regime

  • Capital expenditure incurred on the purchase of the IPRs is amortizable generally over five years from the year of purchase. 
     
  • If the IPR is subsequently sold, the sales proceeds exceeding the adjusted tax base will be taxable, capped at the total amount previously claimed as deduction. Whereas, if the adjusted tax base exceeds the sale proceeds, the excess will be deductible.
     
  • The tax deduction will be denied where a relevant IPR is:

(i) purchased from an affiliated person;
(ii) licensed to another person for use wholly or principally outside Hong Kong;
(iii) used in certain sales-lease-back arrangements;
(iv) acquired by certain non-recourse debt arrangements; or
(v) acquired in relation to certain early termination of a license.


New deeming provision

Royalties received by a nonresident for the use of, or the right to use, the three new IPRs to a Hong Kong taxpayer will generally be taxable in Hong Kong. The Hong Kong person making the above payments to the nonresident is required to withhold tax from its payment and remit it to the Hong Kong tax authority.

The Amendment Ordinance was passed by the Legislative Council on June 20. With the expansion in the scope of tax deductions provided therein, capital expenditure incurred by enterprises for the purchase of various major types of IPRs, as well as the expenses for the registration of IPRs under applicable regimes, would be deductible.

For additional information, please contact Ms. Amie Cheung at amie.cheung@lccpa.com.hk