The Government published the Inland Revenue (Amendment) (Tax Concessions for Intellectual Property Income) Bill 2024 (“the Bill”) in the Gazette on March 28, 2024 to implement the "patent box" regime that provides tax concessions for onshore profits from qualifying intellectual properties (IPs) aiming to push ahead on its goals of becoming an innovation and technology centre and a regional IP trading centre.

Eligible IP assets

Only patents and other IP assets that are functionally equivalent to patents would qualify as eligible IP assets, which include:

• patents;
• copyrighted software;
• plant variety rights; and

Eligible IP assets will also include applications for patents and plant variety rights, as well as those patents and plant variety rights granted in or outside Hong Kong. In other words, taxpayers with qualifying profits derived from eligible IP assets registered in other jurisdictions could benefit from the “patent box” tax incentive.

Eligible IP income

Income derived from eligible IP assets includes:

• income derived from an eligible IP asset in respect of (i) the exhibition or use of, or a right to exhibit or use the asset (whether in or outside Hong Kong); or (ii) the imparting of, or undertaking to impart, knowledge directly or indirectly connected with the use of the asset (whether in or outside Hong Kong);
• income arising from the sale of an eligible IP asset;
• portion of the income from the sale of a product or service, on a just and reasonable basis (e.g. based on the transfer pricing principles), is attributable to the eligible IP assets; and
• insurance, damages or compensation derived in relation to an eligible IP.

OECD’s nexus approach of will be adopted in ascertaining the extent of IP income that is entitled to preferential tax treatment.

Eligible expenditures

Eligible expenditures only include R&D expenditures that are directly connected to the eligible IP asset. Acquisition costs of the IP asset are not considered as eligible expenditures.

Eligible expenditures cover the expenditures on R&D activities that:

• undertaken by the taxpayer inside or outside Hong Kong;
• outsourced to unrelated parties and undertaken inside or outside Hong Kong; and
• outsourced to resident related parties and undertaken inside Hong Kong.

Eligible person

An eligible person is a person who is entitled to derive eligible IP income from an eligible IP. This means that an eligible person does not need to be the legal owner of an eligible IP.

Concessionary tax rate

The concessionary tax rate is 5%. 

The regime, if passed, will have retrospective effect for financial years ending on or after 1 April 2023.

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