Hong Kong has proposed amendments to its tax laws to broaden deductions for intellectual property acquisitions and upfront licence fees, including purchases from associated enterprises, as part of a wider push to establish the city as a regional IP trading hub.
Hong Kong’s government has proposed legislative changes to broaden tax deductions for the acquisition and use of intellectual property, supporting its goal of positioning Hong Kong as a regional IP trading hub. The proposals were presented to the Legislative Council Panel on Commerce, Industry, Innovation and Technology on 19 May 2026, following a two-month stakeholder consultation completed earlier in the year.
The proposals outline the strategic progress and legislative updates regarding Hong Kong’s evolution into a regional intellectual property (IP) trading hub. It highlights several government initiatives aimed at fostering a vibrant innovation ecosystem, including the implementation of “patent box” tax incentives and the launch of an IP financing sandbox.
A significant portion of the text focuses on proposed tax law amendments designed to broaden deductions for IP acquisitions, even when transactions involve associated enterprises. To prevent financial abuse, the government plans to integrate rigorous safeguard measures, such as independent valuation requirements and “main purpose” tests.
Furthermore, the source details efforts to bolster local talent through a new IP Academy and enhance international cooperation with mainland China and ASEAN partners. Ultimately, these measures seek to leverage Hong Kong’s legal and financial strengths to drive high-value economic growth through the commercialisation of creative and technological assets.
The key proposals are as follows:
Tax deduction for IP purchases from associates
Currently, section 16EC(2) of the Inland Revenue Ordinance (IRO) prohibits tax deductions for IP purchased from an associate to prevent tax avoidance. The new proposal seeks to relax this safeguard, allowing deductions for purchases from both domestic and non-Hong Kong associates. This change aims to:
- Encourage multinational enterprises (MNEs) to centralise and bring new IPs into Hong Kong.
- Facilitate domestic intra-group transfers, allowing IPs to be moved to associates best positioned for commercialisation.
- Drive R&D and business activity, creating demand for professional services and generating additional government revenue.
The “main purpose test” and safeguards
To prevent abuse, such as “looping” IP within a group to claim excessive deductions or shifting offshore losses into Hong Kong, several safeguards will be implemented:
- Main purpose test: No deduction will be allowed if the main purpose (or one of the main purposes) of the purchase is to obtain a tax benefit, defined as the avoidance, postponement, or reduction of tax liability. This test aligns with international standards, though incidental tax benefits will not trigger a denial of deduction.
- Domestic transfer caps: For intra-group transfers within Hong Kong, the allowable deduction is capped at the seller’s original purchase cost plus qualified R&D expenditure, or the actual purchase price, whichever is lower.
- Cross-border valuation: For purchases from non-Hong Kong associates exceeding a specified threshold, a third-party independent valuation report is required to ensure the price is at arm’s length.
Tax deduction for upfront licence fees
While recurring royalties (revenue expenditure) are already deductible, upfront licence fees—often regarded as capital in nature—previously were not. The Government proposes to allow deductions for these lump-sum payments for the right to use IP (including patents, know-how, and specified IP rights). These include:
- Amortisation: To minimise financial distortion, the deduction will be evenly spread over the licensing term, aligning with accounting treatment.
- Claw-back provisions: If a licensing arrangement is terminated, assigned, or amended, “claw-back” mechanisms will apply to recoup previously allowed deductions.
Tax deduction for IP used outside Hong Kong
Generally, Hong Kong follows a “tax symmetry” principle where no deduction is allowed for expenditures incurred to produce offshore profits. However, under the new proposal, if IP income generated from a licensee outside Hong Kong is taxable in Hong Kong under the Foreign-Sourced Income Exemption (FSIE) regime, a proportionate tax deduction will be allowed for the capital expenditure incurred to purchase that IP.
Other notable developments
Beyond tax deductions, the government has introduced several initiatives to enhance the IP ecosystem:
- “Patent Box” tax incentive: Launched in July 2024, this provides a concessionary tax rate of 5% for qualifying profits derived from eligible IP, such as patents and software copyright.
- IP financing sandbox: Launched in December 2025, this pilot project allows banks and enterprises to test the full lifecycle of IP-collateralised financing in a risk-controlled environment.
- Pilot patent valuation support scheme: Expected to launch in the third quarter of 2026, this scheme will provide matching grants of up to $80,000 to help SMEs conduct quantitative valuations of their patent assets.
- Intellectual property academy: A two-year pilot programme is set to commence at the end of 2026 to provide systematic, high-level IP training to various sectors.
- International Recognition: Hong Kong’s IP regime continues to rank highly globally, with the “Shenzhen–Hong Kong–Guangzhou” cluster ranking first in the 2025 Global Innovation Index.
- Hong Kong Technology and Innovation Support Centre (HKTISC): Operated by the Hong Kong Productivity Council, this centre provides local SMEs and start-ups with patent search, technology transfer, and IP management services. It is part of a national network of over 200 TISCs.
- Business matching: Flagship events like the BIP Asia Forum have introduced sessions like “IP Go Global Business Matching,” where local lawyers provide expert consultations to Mainland enterprises looking to expand internationally.
