Hong Kong Gazettes IPR Tax Deduction Extension Act

by Mary Swire, Tax-News.com, Hong Kong

20 December 2011

Hong Kong’s Inland Revenue (Amendment) (No. 3) Ordinance 2011 (the Amendment Ordinance), which implements the proposed profits tax deduction for capital expenditure incurred on the purchase of copyrights, registered designs and registered trademarks, was gazetted on December 16, 2011.

With regard to intellectual property rights (IPR), under Hong Kong’s arrangements existing since the 1982/83 tax year, capital expenditure by enterprises to purchase patent rights and industrial know-how is deductible under profits tax. In February last year, to promote the wider application of intellectual property by enterprises and the development of creative industries, the Financial Secretary, John C. Tsang, stated the intention to extend the deduction.

The Amendment Ordinance therefore amends the Inland Revenue Ordinance (IRO) to provide such a tax deduction (spreading over five succeeding years on a straight-line basis starting from the year of purchase) for capital expenditure incurred on copyrights, designs and trademarks, commencing from the 2011/12 tax year.

Deduction is only allowable for “registered designs” or “registered trademarks”, which must have been registered on the date of acquisition. Registration in either Hong Kong or overseas would be recognized.

Taxpayers must also have acquired the legal and economic ownership of the relevant IPRs. The relevant IPRs must also be in use for the production of chargeable profits, or, where a relevant IPR is used only partly in the production of chargeable profits, a deduction is only allowed for the portion of capital expenditure that is relevant to the production of such chargeable profits. Where a relevant IPR is owned by more than one taxpayer, a tax deduction for each taxpayer is granted for the amount of capital expenditure that is proportional to his/her share in the relevant IPR.

Legal expenses and valuation fees incurred in connection with the purchase of the relevant IPRs are deductible, provided that such expenditure is not deductible under any other provisions of the IRO.

However, under anti-avoidance measures, deductions are not allowed, for example, where the relevant IPRs are purchased wholly or partly from an associated party; where the relevant IPRs are under sale and licence back or leveraged licensing arrangements; or where the relevant IPRs are used wholly or principally outside Hong Kong by a person other than the taxpayer.

The Amendment Ordinance will apply for any year of assessment commencing on or after April 1, 2011. Taxpayers can lodge claims by completing their profits tax returns for 2011/12 in the normal manner.

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