UPDATE: In a press release dated 5 July, the Inland Revenue Department announced that the legislation enacting the patent box became effective on that date.
A concessionary tax rate of 5% will apply retrospectively from the year of assessment 2023/24 to the concessionary portion of Hong Kong-sourced eligible intellectual property (IP) income derived by an eligible person from the use or sale of eligible IP, typically royalties or disposal gains, once the Inland Revenue (Amendment) (Tax Concessions for Intellectual Property Income) Bill 2024, gazetted on 28 March 2024, is enacted.
Eligible IP means IP developed through research and development (R&D) activities and generally does not cover market-related IP, such as trademarks.
The incentive is designed to encourage enterprises to dedicate more resources to R&D and engage in commercialisation transactions making use of patents and other IP protections in Hong Kong.
Highlights of the patent box
Computation of the concessionary portion of assessable profits
The nexus approach will apply to determine the portion of assessable profits arising from eligible IP that will be taxed at the concessionary 5% tax rate. The nexus requirement means the nexus approach adopted by the OECD as a minimum standard under Action 5 of the Base Erosion and Profit Shifting package.The concessionary portion of the assessable profits from eligible IP is determined in accordance with the following formula:
Concessionary portion = Assessable profits* x R&D fraction**
* Assessable profits = Eligible IP income – deductible outgoings or expenses -/+ tax depreciation allowances/balancing charges
** R&D fraction =
| Eligible R&D expenditure × 130% |
| Eligible R&D expenditure + Non-eligible expenditure |
The R&D fraction will be capped at 100% if the percentage so computed is more than 100%.
The treatment of eligible R&D and non-eligible expenditure (including capital expenditure) is as follows:
| Expenditure incurred by eligible person connected to eligible IP | Eligible R&D expenditure |
Non-eligible expenditure |
| R&D activities carried out by the eligible person | ✔ | |
| R&D activities carried out on behalf of the eligible person | ||
|
✔ | |
|
✔ | |
|
✔ | |
|
✔ | |
| Acquisition costs of eligible IP | ✔ |
Interest payments, payments for land or buildings or for any alteration, addition or extension to a building are excluded from eligible R&D and non-eligible expenditure.
Election to apply the concessionary tax rate
An election to apply the concessionary tax rate must be made in writing. The election, once made, is irrevocable.Abandonment, revocation, cancellation or withdrawal of eligible IP
If the 5% concessionary tax rate has been granted but the IP is subsequently abandoned, revoked, cancelled, withdrawn, etc., the concessionary portion of assessable profits previously taxed at the 5% tax rate will be regarded as trading receipts and taxable at the difference between the normal tax rate and the concessionary tax rate in the year the abandonment, revocation, cancellation, withdrawal occurs.An eligible person is required to notify the Inland Revenue Department in writing within four months after the end of the year when any of the above events occurs unless a tax return has been submitted.
Recordkeeping
An eligible person must keep sufficient records to establish that the income concerned is eligible IP income, details of all R&D expenditures incurred and details of eligible IP to which the income relates.
BDO comments
The introduction of a patent box is a welcome incentive to encourage taxpayers to undertake more R&D activities and IP commercialisation in Hong Kong.Carol Lam
BDO in Hong Kong