Hong Kong Explains IPR, Royalties Taxation
26 July 2013
Posted by: Author: Mary Swire
Author: Mary Swire
Hong Kong's Inland Revenue Department (IRD) has issued amended interpretation and practice notes for taxpayers, regarding the profits tax deduction for capital expenditure on intellectual property rights (IPR), and the taxation of royalties derived from their licensing.
As an incentive to boost technological innovation in local industries, Section 16E was added to the Inland Revenue Ordinance in 1983 to provide a deduction for the capital cost of acquiring patents and, from 1992, rights to "know-how," which was confined to industrial information and techniques for manufacturing of goods.
To promote the wider application of IPR by local businesses and to facilitate the development of creative industries in Hong Kong, it was again proposed and approved in the 2010-11 Budget that the profits tax deduction should be extended to cover capital expenditure incurred on the purchase of three types of commonly-used IPR – copyrights, registered designs and registered tradem
The purpose of the amended note is therefore to set out in detail the IRD's views and practice on the profits tax deduction relating to the purchase of patent rights, rights to know-how, copyrights, registered designs and registered trademarks, and also to include three other major amendments to section 16E.
Firstly, the "use in Hong Kong" condition was removed as, with globalization, business activities are no longer confined to Hong Kong. In other words, capital expenditure on the purchase of patent rights and rights to any know-how is deductible irrespective of whether they are used, so long as other deduction conditions are satisfied.
Secondly, the sales proceeds that should be brought to tax upon sale of the patent rights and rights to know-how for which deductions have been previously allowed, have been capped at the amount of those deductions, so as to be in line with Hong Kong's policy of not taxing capital gains.
Finally, and for the avoidance of doubt, a section has been added to provide explicitly that deduction would be available for legal expenses and valuation fees incurred in connection with the purchase of patent rights and rights to any know-how.
With regard to the taxation of royalties, the IRD takes the view that whether royalties derived from the licensing of IPR are chargeable to tax in Hong Kong depends on the facts and circumstances of each case.
For example, if an IPR is created or developed by a taxpayer carrying on business in Hong Kong and is licensed by the taxpayer to another party for use outside Hong Kong, the royalties so derived will generally be regarded as Hong Kong sourced income and hence will be subject to Hong Kong tax.
If a taxpayer has purchased the proprietary interest of an IPR and licenses that IPR to another party for use outside Hong Kong, the royalties so derived will generally be regarded as non-Hong Kong sourced income and hence will not be subject to Hong Kong tax. Additionally, no deduction will be allowed for the capital expenditure incurred on acquiring the IPR interest.
However, if a taxpayer only obtains a license to use an IPR from its owner (i.e. the taxpayer has not obtained the proprietary interest of the IPR) and then sub-licenses the IPR to another party for use outside Hong Kong, the IRD will, in ascertaining whether the royalties so derived are Hong Kong sourced income, take the place of acquisition and granting of the license as the source of the income.