Hong Kong: Upfront lump-sum spectrum license fees must be capitalized (court decision)

Upfront lump-sum spectrum license fees paid by a telecommunication service provider must be capitalized and were not deductible.

Must be capitalized and were not deductible

The Court of Appeal held that upfront lump-sum spectrum license fees paid by a telecommunication service provider must be capitalized and were not deductible.

The case is: China Mobile Hong Kong Company Limited v Commissioner of Inland Revenue (3 November 2022)


The taxpayer is a mobile telecommunication service provider in Hong Kong. The taxpayer argued that the upfront lump-sum spectrum license fees it paid to the telecommunications authority for the use of spectra were revenue (versus capital) in nature because the fees were a payment “for use” of the spectra (versus “for the right to use” the spectra). The taxpayer specifically argued that because it paid the fees for use of spectra, and then re-sold exactly the same thing to its customers for their use of the spectra, the fees represented the direct costs for providing telecommunication services to its customers and earning the taxpayer’s income and were thus revenue in nature.

The court rejected the taxpayer’s argument, finding that:

  • The distinction between payments made “for use” of the spectra and “for the right to use” the spectra is not determinative because there is no single decisive test to determine whether a payment is capital or revenue in nature.
  • The proper construction of the telecommunications ordinance and the subsidiary legislation suggests that the legislature did not intend to make such a distinction, and there is nothing in the ordinance suggesting that the obligation to pay the fees only arises upon actual use of the spectra either by the taxpayer or its customers.
  • The fees were paid for the valuable exclusive right granted to the taxpayer to use the designated spectra assigned to it for 12-15 years. They were costs for acquiring or enlarging the profit-earning structure of the taxpayer’s business. The payments brought into existence fixed assets of an enduring nature which are held and used by the taxpayer in its business.
  • The distinction between payment as a condition for the assignment of the designated spectra and payment as consideration for the assignment is of little relevance and does not answer the question of what the fees were really paid for.
  • The fees did not fulfil exactly the same business and economic function as annual spectrum usage fees (which were periodic payments for the use of or the right to use spectrum for a short period only) and cannot be regarded as compounded annual payments.

KPMG observation

The decision reiterated the key principles for determining whether an expenditure is capital or revenue in nature, namely whether the expenditure is incurred: (1) once and for all, (2) to bring into existence an asset with enduring benefit, and (3) to create, acquire or enlarge the permanent income-producing structure of the taxpayer. These principles are well established by case law and are not in dispute, but their application to a particular set of facts is often contentious.

For more information contact a KPMG tax professional:

David Ling | +1 609 874 4381 | davidxling@kpmg.com


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