Hong Kong: Updated proposals to enhance IP tax deduction regime
Updated proposals following consultation launched earlier this year
Following a consultation launched in January 2026, the government has released updated proposals to enhance the intellectual property (IP) tax deduction regime.
The proposals would introduce two key enhancements:
- Allowing a tax deduction for the acquisition costs of IP (including patents, know-how, copyrights, performer’s economic rights, protected layout-design (topography) rights, protected plant variety rights, registered designs, and registered trademarks) acquired from associates
- Allowing a tax deduction for upfront license fees incurred for the rights to use IP under licensing arrangements that are capital in nature
For acquisitions of IP from overseas associates, the deduction would be the acquisition cost incurred. For acquisitions from a Hong Kong associate, the deduction would be the lower of the acquisition cost incurred or the sum of the deduction allowable to the seller and the qualified research and development (R&D) expenditure incurred by the seller. The taxable amount for the seller in domestic intra-group transfers would be capped at the amount of the deduction previously allowed.
Tax deductions of the IP acquisition cost would be available even if the IP is used by a licensee outside Hong Kong when the related IP income is taxable in Hong Kong under the foreign-source income exemption (FSIE) regime, allowed on a proportionate basis. A third-party independent valuation report would only be required for cross-border intra-group IP transfers, with the threshold to be set in future guidance notes. Additionally, the domestic transaction exemption would apply to domestic intra-group IP transfers.
Regarding the tax deduction for upfront license fees, the deduction would be spread evenly over the licensing term. In the event of termination or assignment, recouped amounts would be capped at the amount of the tax deduction previously allowed. Upfront payments under franchise arrangements consisting of capital expenditure for the right to use eligible IPs would be deductible if the enterprise provides a relevant breakdown of the expenditure.
The government plans to introduce a bill on the proposals into the Legislative Council in 2026. The enhanced tax deduction would become effective for the acquisition of IPs or the rights to use IP on or after April 1, 2026.
KPMG observation
The updated proposals do not respond to some issues raised, such as recommendations to (1) expand the scope of tax deduction to cover all intangible assets and commercially valuable rights commonly used by Hong Kong businesses, and (2) remove 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).
Read a May 2026 report prepared by the KPMG member firm in Hong Kong