The Inland Revenue (Amendment) (Tax Concessions for Intellectual Property Income) Ordinance 20241 (the Ordinance) was gazetted on 5 July 2024. The Ordinance introduces a patent box tax incentive in Hong Kong that offers a 5% concessionary tax rate for Hong Kong-sourced taxable (i.e. non-capital) profits derived from the use or sale of eligible IPs, subject to certain conditions. The incentive applies retrospectively from the financial year 2023/24. 

Tech Sectors

The patent box is targeted at “traditional” tech sectors like biotech, proptech, deeptech and electronics, in which patent protection is very common. Essentially, patent applications as well as granted patents are covered under the regime, including original grant patents, foreign patents (and patent applications) re-registered in Hong Kong, and short-term patents.

Software Sector

However, do not confuse with the name 'patent box' as it covers beyond patents, but also plant variety rights and copyright subsisting in software. It implies that companies that invest in R&D that produces qualifying software, and the subsequent exploitation of that software to generate profits, could avail themselves of the new patent box regime. 

Fintech Sector

Interestingly, fintech is an area that is specifically mentioned in the Inland Revenue Department’s guidance on the patent box. Of course, given Hong Kong’s status as an international financial centre, this may not be too surprising; but it aptly demonstrates the Government’s commitment to supporting the development of fintech in Hong Kong. 

Creative Industries

Perhaps less obvious is how the patent box can apply to creative industries. For example, could video game development qualify for the purpose of the patent box? For most video games, probably not – but we have seen new technologies emerge from video game development before. Guidance from the Inland Revenue Department states that certain software projects such as “designing complex data capture and analysis tools that require new technical solutions” and “handling application program interfacing where unknown program interactions require new technical solutions” are “likely qualifying R&D activities” for the purpose of the patent box. It should also be kept in mind that unlike some jurisdictions, in Hong Kong, software can potentially be protected by patents as well as copyright. 

Eligibility

It should be noted that in order to qualify for these benefits, the IP must be generally developed internally by the taxpayer. If the R&D involves acquiring IP or certain outsourcing activities, the portion of profits eligible for the lower tax rate may be reduced. Additionally, for patents and plant variety rights, enterprises need to obtain local registration for their IP in order to enjoy the concession. This requirement will come into force two years after the “patent box” tax incentive comes into operation.