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Hong Kong introduces a patent box tax incentive for taxable profits derived from certain types of intellectual property

The Inland Revenue (Amendment) (Tax Concessions for Intellectual Property Income) Ordinance 2024 (the “Ordinance”) was enacted to introduce a patent box tax incentive for taxable profits derived from certain types of intellectual property in Hong Kong (the “Patent Box Incentive Regime”). This measure aims to promote research and development (“R&D”) and the commercialization of intellectual property by offering preferential tax rates. The Ordinance was gazetted on 5 July 2024 and applies retroactively from the year of assessment 2023/24.

  • Overview of the Patent Box Incentive Regime

The Patent Box Incentive Regime grants a concessionary tax rate of 5% (the “Concessionary Rate”) on specific income derived from eligible intellectual property rights (“IP”), as defined in the Ordinance. This concession applies solely to revenue-based IP income, excluding capital gains, which remain exempt from profits tax in Hong Kong.

To qualify, a taxpayer must (a) meet the criteria of an eligible person under the regime, (b) derive qualifying IP income (“Eligible Income”) from eligible IP, and (c) submit an irrevocable written election for the Eligible Income to be taxed at the Concessionary Rate.

Eligible Person

An eligible person is defined as any individual or entity entitled to receive Eligible Income from qualifying IP. This encompasses both legal owners of the IP and non-owners who hold income rights to the IP.

Eligible IP

Only income that derives from the categories of income identified under the Ordinance (the “Eligible IP”) can enjoy the Concessionary Rate. Eligible IP refers to IP that is generated from R&D activities and includes:

  • patents, whether granted or applied for under the Patents Ordinance (Cap. 514) in Hong Kong or through a patent office outside Hong Kong;
  • plant variety rights, and
  • copyrighted software protected under the Copyright Ordinance (Cap. 528) or equivalent foreign law.

For patents and plant variety rights, applications made or granted after 5 July 2026 outside Hong Kong must also be filed or granted in Hong Kong.

Eligible Income

Eligible Income includes:

  • income from the exhibition or use of an Eligible IP asset, generally including royalties and licensing income;
  • the portion of income from the sale of products or services attributable to an Eligible IP; or
  • income from the sale of an Eligible IP itself;
  • proceeds from insurance, damages, or compensation in relation to an Eligible IP.

Only IP developed by the taxpayer qualifies as Eligible IP. If R&D involves acquiring third-party IP or outsourcing, the Eligible Income may be adjusted proportionately.

The determination of Eligible IP income subject to the Concessionary Rate is based on the “nexus approach” outlined by the Organization for Economic Co-operation and Development (OECD) in its Base Erosion and Profit Shifting (BEPS) Action 5 Report.

  • Conclusion

The Patent Box Incentive Regime is a strategic initiative to incentivize IP development and innovation in Hong Kong. By offering substantial tax relief to businesses that invest in R&D and IP commercialization, the regime aims to bolster Hong Kong’s standing as a hub for IP trading and foster growth in the industrial and R&D sectors associated with IP in the region.

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