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Updates on Tax Deduction R&D Expenditure in Hong Kong
 
Date: 3 Oct 2019

Updates on Tax Deduction R&D Expenditure in Hong Kong



The Inland Revenue Department (“IRD”) released practice note DIPN 55 to set out the IRD’s interpretation of the R&D tax concession, the practical application of the concession and documentation requirements.

Commencing from the year of assessment 2018/19 (expenditure incurred from 1 April 2018), qualifying R&D activities are eligible for either:
  • Type A expenditure: 100% tax deduction; or
  • Type B expenditure: 300% tax deduction for the first HK$2 million and 200% for the remainder
    (without limit). 
Key features of tax deduction regime:

Registration of patents is not a prerequisite for an activity to be regarded as an R&D activity.

Must an R&D activity be wholly undertaken and carried on in Hong Kong?

DIPN 55 clarifies that the R&D activity is not required to be wholly carried on in Hong Kong, but only local Hong Kong expenditure may qualify for the enhanced deductions.

 

Qualifying R&D expenditure

 
  • staffing costs
    • on employees of the enterprise itself (i.e. an employer and employee relationship subsists) engaged directly and actively in a qualifying R&D activity.
    • borne by an enterprise relate to secondees or expatriates sponsored by the enterprise.
  • directors’ remuneration is excluded
    (apportionment can be allowed where a person occupies a dual role in being both a director and an employee directly and actively engaged in a qualifying R&D activity.)
  • direct consumables e.g. a laboratory chemical used in a qualifying R&D activity, electronic components that are integrated into a larger assembly in such a way that they are effectively transformed into part of a larger prototype. Software is not with consumable items.
  • expenditures incurred under Cost Contribution Arrangements (“CCA”) may be eligible provided they meet various conditions such as:
    • enterprises derive proportionate benefits from the R&D activities under the CCA
    • each participant actively participates in the R&D project
    • there are co-ownership of rights amongst CCA participants
    • payments to external contractors (other than DLRIs) are not eligible for the enhanced R&D deduction.

Rights fully vested in the enterprise

  • rights includes patented rights, unregistered know-how and work-in-progress intangibles.
  • co-ownership of rights isacceptable
  • use SPV to hold IPs is acceptable if the SPV acts as a nominee for the enterprise performing an R&D activity.
 
DIPN 55 clarifies both the nature of qualifying activities and associated R&D expenditure under the enhanced deduction regime.  Determining whether a prospective project would be considered as an R&D activity or a qualifying R&D activity must be assessed on a case by case basis.  Proper documentation in respect of such activities will be critical to facilitate successful R&D claims.
 
Clients who wish to explore more details can contact Ms. Amie Cheung at amie.cheung@lccpa.com.hk