Summary

After a two-month stakeholder consultation conducted in early 2026, the HKSAR Government recently put forward its refined proposals on enhancing the intellectual property (IP) tax deduction regime in the Hong Kong SAR (Hong Kong). In this tax alert, we discuss the refined proposals and share our observations.

Background

The HKSAR Government launched a stakeholder consultation on its proposals to enhance the intellectual property (IP) tax deduction regime in Hong Kong in late January 2026¹. It received a total of 12 submissions (including our firm’s submission) on the consultation paper issued (the January consultation paper).

In a Legislative Council brief paper issued last week (the May LegCo paper)², the government put forward its latest refined proposals on enhancing IP tax deduction regime based on the feedback received. The refined proposals take on board some, but not all, of the recommendations received from stakeholders during the consultation exercise. At a Legislative Council meeting held on 19 May 2026, a representative of the Inland Revenue Department (IRD) clarified some of the proposed tax treatments mentioned in the refined proposals.

The latest government proposals

The two key enhancements of the existing IP tax deduction regime proposed in the January consultation paper are: (1) allowing deduction for acquisition costs of IPs acquired from associates and (2) allowing deduction for upfront licence fees incurred for the rights to use IPs under licensing arrangements that are capital in nature.

1. Allowing deduction for acquisition costs of IPs acquired from associates

The following table compares the original proposals in the January consultation paper and the refined proposals in the May LegCo paper regarding the above two enhancements.

	Original proposals	Latest refined proposals
Scope of IPs	Patent rights, rights to know-how and the six types of specified IP rights³	No change
Deductible amount for the purchaser	For acquisition from Hong Kong or overseas associate => the acquisition cost incurred.	For acquisition from overseas associate => the acquisition cost incurred For acquisition from Hong Kong associate => the lower of: the sum of (i) the deduction allowable to the seller in relation to the purchase of the IP⁴ and (ii) the qualified R&D expenditure⁵ incurred by the seller in relation to the R&D activities carried out on such IPs, or the acquisition cost incurred.
Taxable amount for the seller (Domestic intra-group transfers only)	The full amount of sales proceeds received less any amount of deduction for IP acquisition cost not yet allowed to it.	The sales proceeds received, capped at the amount of deduction previously allowed.
Existing anti-abuse measures	All existing anti-abuse provisions continue to apply, including denial of deduction when the IP is used by a licensee outside Hong Kong.	Tax deduction of the IP acquisition cost will be available even if the IP is used by a licensee outside Hong Kong if the related IP income is taxable in Hong Kong under the foreign-source income exemption (FSIE) regime. The capital expenditure incurred for acquiring the IP concerned will be allowed for tax deduction in a proportionate basis (i.e. by reference to the taxable IP income determined under the nexus approach of the FSIE regime)⁶.
New main purposes test	Introduced to disallow tax deduction if the main purpose or one of the main purposes of the IP acquisition is to obtain a tax benefit.	No change
Third-party independent valuation report	Required for both domestic and cross-border intra-group IP transfers if the acquisition cost of the IP is not less than HK$3 million. Individual valuation report required for each IP of which the purchase cost exceeds the HK$3 million threshold.	Only required for cross-border intra-group IP transfers. The HK$3 million threshold has been removed. The threshold would be set out in a guidance note to be issued by the IRD and may be adjusted where necessary. Multiple deductible IPs and other assets may be covered in the same third-party independent valuation report, provided that the report contains the valuation breakdown of each of the IPs of which the purchase cost is not less than the specified threshold.
Transfer pricing rules and documentation requirements	The domestic transaction exemption would not apply to domestic intra-group IP transfers.	The domestic transaction exemption applies to domestic intra-group IP transfers.

2. Allowing tax deduction for upfront licence fees for the rights to use IP

The proposals set out in the May LegCo paper are largely the same as those mentioned in the original proposals in the January consultation paper, which are summarised below:

Scope of the deduction – All forms of licences will be covered but IPs eligible for the deduction will be limited to patent rights, rights to know-how and the six types of specified IP rights³.
Deduction period – Deduction will be spread evenly over the licensing term, in line with the accounting treatment on amortisation of the licence. There would be special rules to deal with any subsequent amendments to the licensing arrangement.
Claw-back arrangement – In case the licensing right is terminated or assigned in whole or in part, any excess of the proceeds from the termination or assignment over the tax deduction amount not yet allowed will be recouped. The recouped amount will however be capped at the amount of tax deduction previously allowed.
Deeming provision – Upfront licensing income not otherwise chargeable to profits tax received by a Hong Kong licensor will be deemed as taxable trading receipts on the basis that deduction has been allowed to the licensee.
Anti-avoidance measures – The Commissioner of Inland Revenue will be empowered to determine the arm’s length pricing, request a valuation report and allocate the consideration in relation to an IP licence when assessing a tax deduction claim.
Treatment of franchise – A franchise arrangement typically involves licensing of multiple IPs (e.g. trademark, brand name, know-how, copyrighted software and other proprietary rights) plus detailed control over how the franchisee operates the business concerned. In our submission to the government, we sought clarifications on the deductibility of upfront payments made under franchise arrangements. The refined proposals now clarify that a similar tax deduction will be available if such upfront payments consist of capital expenditure incurred for the right to use any of the IPs eligible for the deduction, provided that the enterprise can provide the relevant breakdown of the expenditure for such IPs. Details will be set out in a guidance note to be issued by the IRD.

Legislative timeline and effective date

The government plans to introduce the relevant Amendment Bill into the Legislative Council within 2026. Upon enactment, the enhanced tax deduction will be applicable to the acquisition of IPs or the rights to use IP on or after 1 April 2026.

KPMG observations

We welcome the government’s initiative to enhance the IP tax deduction in Hong Kong and commend its positive responses to some of the views expressed by the industry and tax profession during the consultation exercise.
In particular, we are glad to see that the government has taken on board our recommendations on (1) allowing tax deduction where the IP is used by a licensee outside Hong Kong and the related offshore IP income is taxable under the FSIE regime, (2) limiting the taxable amount of sales proceeds for the seller in a domestic intra-group IP transfer to the tax deduction previously allowed to it (and in return disallowing any step-up for the acquisition cost for the purchaser for tax deduction purposes), and (3) revisiting the HK$3 million threshold for the third-party independent valuation requirement⁷.
However, the refined proposals have not responded to some other issues raised, such as our recommendations of (1) expanding the scope of tax deduction to cover all intangible assets and commercially valuable rights commonly used by Hong Kong businesses and (2) removing the blanket denial of tax deduction when the IP is used by a licensee outside Hong Kong in all situations (and not just when the related IP income is taxable under the FSIE regime). In addition, where multiple IPs used together to generate revenue for businesses are transferred as a bundle, further thoughts should be given to requiring individual valuation of each IP involved (instead of on a portfolio basis) for tax deduction purposes as this may give rise to practical challenges and increase compliance burden.
Separately, to further enhance the overall IP tax regime in Hong Kong, we recommend (1) enhancing the current super tax deduction for R&D expenditure to cover cross-border R&D activities and (2) reforming the existing patent box tax incentive as the OECD has clarified that the incentive in its current form does not qualify for the Substance-based Tax Incentive (SBTI) Safe Harbour under the BEPS Pillar 2 initiative⁸.

The government has already announced in the 2026/27 Budget that it will review and enhance tax arrangements for R&D expenditures related to the cross-boundary R&D activities conducted in the Greater Bay Area9. We will provide our comments to the government when more detailed proposals on (1) above are released and continue to liaise with the government on (2) above regarding the potential options for revising the existing patent box tax incentive.

If you have any questions or require assistance regarding the above content, please feel free to contact us via taxservicesenquiry@kpmg.com.

1. For more details, please refer to our Hong Kong SAR Tax Alert, Issue 3, February 2026 via this link: The government’s proposals on enhancing intellectual property tax deduction in Hong Kong.

2. The Legislative Council brief paper can be accessed via this link: Panel on Commerce, Industry, Innovation and Technology

3. The six types of specified IP rights are (i) copyrights, (ii) performer’s economic rights, (iii) protected layout-design (topography) rights, (iv) protected plant variety rights, (v) registered designs and (vi) registered trade marks.

4. This refers to the notional deduction amount allowable to the seller. It has yet to be seen whether this is intended to cater for the situation where the seller was not able to claim a tax deduction for the purchase cost in a previous year (i.e. under the existing IP tax deduction regime) when it purchased the IP concerned.

5. Qualified R&D expenditure means any expenditure incurred in relation to the R&D activities for which deduction is allowable under section 16B of the Inland Revenue Ordinance.

6. The IRD indicated in the Legislative Council meeting that it will issue further guidance to illustrate the computation of the tax deduction amount.

7. Currently, Singapore requires a third‑party independent valuation report for IP transfers between related parties only where the IP acquisition cost is not less than S$10 million.

8. For more details about the SBTI safe harbour, please refer to our Hong Kong BEPS publication via this link. Please also refer to the FAQs on Global Minimum Tax recently updated by the OECD for discussion on the SBTI safe harbour and treatment of IP tax regimes adopting the OECD’s nexus approach via this link: https://www.oecd.org/content/dam/oecd/en/topics/policy-sub-issues/global-minimum-tax/faqs-on-model-globe-rules.pdf

9. For more details, please refer to our webpage on the 2026/27 Hong Kong Budget via this link.