Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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Profits Tax - Intellectual Property

Purchase cost of Patent, Know-how

Section 16E of Inland Revenue Ordinance allows full deduction for the expenditure incurred for acquiring patent rights or rights to any know-how for earning assessable profits.  If not for Section 16E, they would have been disallowed because of capital nature.

Only registered patent is deductible. But no registration is required for know-how under Hong Kong law.

“Patent” is defined to mean the rights to do or authorize the doing of anything which would, but for that right, be an infringement of a patent.

“Know-how” is defined to mean any industrial information or techniques likely to assist in the manufacture or processing of goods or materials. 

To qualify the deduction, the patent etc. must be for production of assessable profits and not one purchased from an “associate”.  If it is only partly used for production of assessable profit, make apportionment for the expenditure between "deductible" and "non-deductible". From 2011/12 onward, the condition of "use in Hong Kong" is no longer required. 

“Associate” is widely defined to cover many closely-connected persons. This condition is obviously an anti-avoidance measure.

There is no requirement that the patent etc. acquired must be used in the basis period. If the claimant can prove that it will be used in the production of assessable profits, it is deductible.

Purchase cost include related legal expenses and valuation fee.

Only outright purchase of legal and economic ownership is deductible. No deduction for acquisition of a “licence” for use over a long period - S16E(9) & S16EA(13).

According to Section 16E(3). If the patent having attracted the deduction is sold, the sales proceeds will be deemed taxable receipt  up to the amount of deduction as previously allowed.

Purchase cost of Trademark, Copyright, Design

Purchase cost of copyright or design or trademark is deductible by 5 equal installment in 5 years of assessment according to Section 16EA. The trademark or design must be a registered one.  But no registration is required for copyright under Hong Kong law. Other conditions for deduction under profits tax are same as those of Patent - please refer to above.

Registration cost of patent, trademark, design

Section 16(1)(g) allows the cost of registration of patent rights, trademark, or design which are used for earning assessable profits even though they are capital nature.

Payments for use of Intellectual Property

Regular payments for use of Intellectual Property are deductible if they can satisfy the general test of Section 16(1) "in the production of chargeable profits". Because they are revenue nature, Section 16E or Section 16EA need not be considered.

 

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