The Hong Kong government has published the Inland Revenue (Amendment) (Tax Deductions for Intellectual Property Expenditure) Bill 2026. The bill would widen the deductions available for capital expenditure on buying IP rights or obtaining licenses to use them. It was gazetted on October 16 and will be introduced into the Legislative Council for first and second readings on October 28.

“The bill puts into effect the measure announced in the 2025-26 and 2026-27 Budgets to further enhance the tax deduction arrangements for local IP, lowering the costs of IP transactions to facilitate more IP trading activities and support the development of knowledge-intensive industries in Hong Kong,” a Commerce and Economic Development Bureau spokesman said.

Three changes

Under the current rules, no deduction is allowed for patents, know-how or other specified IP rights bought wholly or partly from an associate. The bill would make three changes:

1. Purchases from associates. Businesses could deduct the cost of eligible IP rights bought from group affiliates and other associates. The government says this will “encourage multinational enterprises to centralize their IP management in Hong Kong.”
2. IP used offshore. A proportionate deduction would be available for IP used by a licensee outside Hong Kong, where the licensing income is taxable in Hong Kong under the foreign-sourced income exemption (FSIE) regime.
3. Upfront license fees. Upfront fees for the use of eligible IP under a licensing arrangement would become deductible.

The changes would apply to contracts entered into on or after April 1, 2026.

The bill also includes safeguards: a main purpose test for purchases from associates, a formula for calculating deductions on purchases from Hong Kong associates, and a requirement for an independent third-party valuation where spending above a specified threshold involves non-Hong Kong associates or licenses from associates. The January consultation paper had proposed a valuation threshold of HK$3 million (US$382,300). The May proposals removed that fixed threshold, leaving the amount to be specified in future Inland Revenue Department guidance.

What changed after consultation

The offshore-licensee deduction was added after the January-March consultation. The original proposals had kept the existing restriction on it. The final bill also drops a provision, proposed in May, that would have taxed upfront licensing income received by Hong Kong licensors that was not otherwise chargeable to profits tax.

Professional bodies had generally supported the proposals. The Law Society of Hong Kong said that allowing deductions for upfront fees “reflects commercial reality, where upfront fees are commonly charged, and will encourage the commercialization and broader use of IP.” The Hong Kong General Chamber of Commerce described the fee change as “a welcome recognition” of industry practice.

KPMG: progress, with gaps

KPMG called the bill “a significant step towards establishing a more inclusive tax deduction regime for IP-related expenditure.” It said that the change for offshore licensees “will partially address the tax asymmetry issue (i.e. income is taxable but the related cost is not deductible).”

It also identified limits. Deductions would still be denied where IP is used offshore, but the income is treated as Hong Kong-sourced, for example where the IP is bought and licensed in Hong Kong. A buyer also could not deduct costs that its seller was previously denied. KPMG asked for guidance on who counts as a “competent” valuer and urged wider reform to address “black hole expenditures”.

Part of a wider IP trading strategy

The bill builds on the patent box regime, enacted in July 2024, which provides a 5 percent concessionary tax rate for the qualifying portion of assessable profits derived from eligible IP income. “Following the implementation of the concessionary tax rate under the ‘patent box’ initiative, the bill will further enhance Hong Kong’s IP tax ecosystem,” the spokesman said. He added that it would “incentivize more local and overseas enterprises to select Hong Kong as their preferred platform for cross-border technology transfer and IP financing.”

Groups that hold IP in several jurisdictions have rarely been able to move it into Hong Kong efficiently, because intra-group transfers were not deductible. If the bill passes, a Hong Kong IP holding company combined with the 5 percent patent box rate becomes much more attractive. Because the changes apply from April 1, 2026, eligible purchases and licenses under contracts entered into on or after that date could benefit, subject to enactment and the applicable conditions. Groups considering IP reorganizations should follow the Legislative Council debate, the final valuation threshold and the Inland Revenue Department guidance that will follow, including on upfront fees in franchise agreements.

- Asia IP