Hong Kong has recently introduced a new patent-box tax incentive aimed at fostering innovation and attracting more businesses to its shores.
Announced in the 2024/25 budget and gazetted on 28 March 2024, this incentive is set to make Hong Kong an even more attractive destination for companies focused on research and development (R&D).
The new patent-box regime offers a reduced tax rate of five per cent on qualifying income from specific types of intellectual property (IP).
This is significantly lower than the standard tax rates in both Hong Kong and other nations, providing substantial savings for businesses involved in the creation and commercialisation of IP.
Under the regime, eligible IP assets include:
- Patents
- Copyrighted software
- Plant-variety rights
*It’s important to note that patents and plant-variety rights need to be locally registered within 24 months from the regime’s commencement.
The regime covers various types of income, such as:
- Royalties and licensing income
- Gains from the disposal of eligible IP
- Embedded IP income in the sale of products or services
- Insurance, damages, or compensation related to eligible IP
How the concessionary tax rate is applied
The portion of IP income eligible for the five per cent tax rate is determined using the “nexus approach” outlined in Base Erosion and Profit Shifting (BEPS) Action 5.
This method ensures that the tax benefit aligns with the level of R&D activity conducted by the business.
The nexus ratio is calculated by dividing qualifying R&D expenditures by the total expenditure incurred to develop the eligible IP.
Qualifying expenditure includes:
- R&D activities undertaken by the taxpayer
- R&D activities outsourced to unrelated parties
- R&D activities outsourced to related parties in Hong Kong
However, acquisition costs of an IP asset are excluded from qualifying expenditures.
Additionally, the qualifying expenditure can be increased by 30 per cent, up to 100 per cent of the total R&D expenditure, providing further incentive for businesses to invest in R&D.
Our advice to business owners
If you are a business owner contemplating moving your operations to Hong Kong, this new patent-box regime could significantly benefit you.
The reduced tax rate of five per cent on qualifying IP income allows for some substantial savings, which you can reinvest into your business to drive further innovation and growth.
Beyond this, Hong Kong also offers numerous other incentives that make it an ideal location for businesses.
These include a strategic location in Asia, a robust legal system, minimal bureaucracy, and an overall business-friendly environment – as well as incredibly low rates for other taxes.
The combination of these factors creates a fertile ground for your business’s success.
We strongly advise you to review your current IP structures and assess your eligibility for this new regime and, if you’d like to take advantage of it, speak to your international tax adviser.
We can help you navigate the complexities and ensure you make the most of the opportunities available in Hong Kong.
For tailored advice on how this regime and other incentives can benefit your business, contact one of our expert international tax advisers.