On 16 October 2026, the Hong Kong Special Administrative Region Government gazetted the Inland Revenue (Amendment) (Tax Deduction for Intellectual Property Expenditure) Bill 2026. The bill proposes a dedicated tax deduction regime for qualifying intellectual property (IP) expenditure incurred by corporations carrying on a trade, profession, or business in Hong Kong. This legislative move aligns with the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 5 nexus approach, which requires a direct link between the tax benefit and the substantive R&D activity that generated the IP. The regime is designed to enhance Hong Kong’s attractiveness as a regional IP holding and management hub, complementing the existing Patent Box regime introduced in 2018. The bill specifies that qualifying IP rights include patents, trademarks, registered designs, copyrights, and trade secrets, provided they are registered or protected in Hong Kong or a jurisdiction with which Hong Kong has a comprehensive double taxation agreement. The deduction will be spread over five years of assessment on a straight-line basis, and a nexus fraction will be applied to ensure that only expenditure directly linked to the creation of the IP qualifies. The government intends for the regime to take effect from the year of assessment 2027/28, subject to passage by the Legislative Council.
Key Takeaways
- New IP Deduction Regime: Corporations will be entitled to a tax deduction for qualifying IP expenditure spread over five years, with a nexus fraction limiting the benefit to expenditure that directly contributes to the IP’s creation. This mirrors the OECD BEPS Action 5 modified nexus approach and aims to prevent harmful tax competition.
- Broad Definition of Qualifying IP Rights: The bill covers patents, trademarks, registered designs, copyrights, and trade secrets, provided they are registered or protected in Hong Kong or a DTA partner jurisdiction. This broad scope supports diverse innovation-driven business models.
- Anti-Avoidance Safeguards: The legislation includes recapture rules for disposals of IP within five years, clawback provisions for excessive deductions, and transfer pricing documentation requirements to ensure arm’s length pricing for intra-group IP transactions.
Disclaimer: This article is compiled and summarized by the AI based on publicly available information and is for general information purposes only. It does not constitute any form of formal tax advice, legal opinion, or basis for performance. Please consult a qualified professional tax advisor or legal counsel for tax advice.
Source: Read Official Announcement