Intellectual property (IP) is a critical asset for businesses operating in a knowledge-based economy. Encouraging the industrial, research and development (R&D), and creative sectors to create and leverage IP will stimulate trading in this area. A thriving IP trading market will also be conducive to creating more business and employment opportunities for relevant professional services, including legal, valuation, management, consultation and agency services.
Recognising the critical role of IP in driving economic growth, the Hong Kong Government is committed to developing Hong Kong into a regional IP trading centre. The city is enhancing the local patent system to better protect and encourage high-value patents and to promote patent-intensive industries. A new “patent box” tax incentive was launched since 5 July 2024, providing tax concessions for qualifying profits sourced in Hong Kong and derived from eligible IP.
Persons Eligible for Concessionary Tax Rate
- Starting from the 2023/24 year of assessment, the qualifying profits derived from eligible IP income by an owner or licensee of an eligible IP can be chargeable to profits tax at a concessionary tax rate of 5 percent, which represents a substantial reduction from the standard profits tax rate of 16.5 percent
Three Types of Eligible IPs
- Patents
- Copyrighted software
- New plant variety rights
Eligible IP Must Be Generated from R&D Activities
- Eligible IPs must be developed by taxpayers themselves
- If the R&D process involves acquisition of other IPs, or outsourcing part of the R&D activities, the amount of profits eligible for the concessionary tax rate may be reduced proportionally
Eligible IP Income
- Eligible IPs can be registered in different places around the world and their related profits sourced in Hong Kong can benefit from the “patent box” tax incentive
Local Registration Requirement
- Enterprises need to obtain local registration for their inventions or new plant varieties in order to enjoy the “patent box” tax incentive. This requirement will only start to implement two years after the “patent box” tax incentive comes into operation
Practical Tips
- Elect for the “patent box” tax incentive when filing profits tax returns
- Review and adjust the business plans and arrangements for R&D activities, and keep records for identifying the eligible IP income
- Pay attention to the 24-month grace period, refine and enhance the filing strategies for patent protection (inclusive of filing original grant patent applications timely) to increase the commercial value of R&D outputs
- Consult legal/tax professionals to effectively leverage on tax incentives
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