Leveraging The Hong Kong Patent Box Regime for Global Competitiveness and Tax Savings

Hong Kong’s 2024 Inland Revenue (Amendment) Ordinance introduced the “Patent Box” tax incentive, offering businesses a 5% concessionary tax rate on qualifying profits from eligible intellectual property (IP). 

This forward-thinking initiative, aligned with the Chief Executive’s 2023 Policy Address, applies to patents, plant variety rights, and software copyrights developed through research and development (R&D) activities. 

In this article, we’ll explore how the Hong Kong Patent Box regime works, the types of IP and income that qualify, and the strategic advantages it offers to businesses in R&D-intensive sectors such as technology, life sciences, and pharmaceuticals. 

Overview of the Hong Kong Patent Box Regime

Effective from the 2023/24 year of assessment, the regime allows qualifying IP, including patents, copyrighted software, and plant variety rights, to benefit from a reduced 5% tax rate on eligible income instead of the normal 16.5% rate. 

Types of Eligible IPs

The Patent Box tax incentive applies to three main types of intellectual property:

1. Patents: Inventions that have been granted protection, either locally or internationally.
2. Plant Variety Rights: Legal rights granted to breeders for new plant varieties.
3. Copyrights in Software: Protection of original software creations, without the need for formal registration.

Eligible IP Must Be Generated from Research and Development (R&D) Activities

To qualify for the Patent Box incentive, the IP must result from genuine research and development efforts. 

Whether the IP is developed entirely in-house or through a combination of internal and outsourced R&D, a clear link between R&D activities and the IP must be established. 

If any part of the R&D is outsourced to related parties outside Hong Kong, the eligible profits may be proportionately reduced.

Eligible IP Income

Income that qualifies for the 5% concessionary tax rate includes:

• Royalties: Payments received from licensing the use of eligible IP to third parties.
• IP Sales: Profits from the sale of the eligible IP itself.
• Product/Service Income: A portion of revenue from the sale of products or services that incorporate or are derived from the eligible IP.
• Compensation: Damages or compensation received for infringement of the eligible IP.

Also Read: Guide to Intellectual Property Protection in Hong Kong

Key Considerations for Businesses: How to Prepare for the Patent Box

Audit IP Portfolios

• Begin by auditing current IP assets to determine which qualify for the Patent Box regime.
• This may involve registering or relocating IP to Hong Kong to meet the local registration requirement, which becomes mandatory two years after the regime’s implementation.

Utilise the 24-Month Grace Period

• Businesses holding non-Hong Kong patents or plant variety rights must be mindful of the 24-month grace period starting in 2026.
• After 5 July 2026, patents and plant variety rights must be filed locally in Hong Kong to remain eligible for the Patent Box tax incentive.
• Patents can be registered through the Original Grant Patent (OGP) system under the Patents Ordinance (Cap. 514).
• Failure to register IP in Hong Kong within this period will result in disqualification from the 5% tax rate, making timely registration essential.

Ensure Proper Documentation of R&D Activities

• The nexus approach requires clear documentation linking R&D expenditures to IP income.
• Businesses should establish comprehensive record-keeping systems to track R&D spending, especially for outsourced activities.
• For those without detailed tracking mechanisms, a transitional three-year rolling average can be used as an interim solution.

Review Eligible IP Income

• The scope of eligible IP income includes licensing fees, royalties, and profits from the sale of products that incorporate eligible IP.
• By reviewing their sales models, businesses can optimise how they generate IP income to ensure they meet the criteria for the 5% tax rate.

Advantages in Applying for OGPs

• Extended Patent Protection: Apply for standard patent protection in Hong Kong, granting a maximum term of 20 years for your invention.
• Lower Filing Costs: Secure the first date of filing at a relatively lower cost compared to other jurisdictions.
• Bilingual Flexibility: Choose to file your application in either Chinese or English, offering greater flexibility for applicants.
• Simplified Communication: Benefit from easier communication with local patent examiners, facilitating the examination process in Hong Kong.
• Deferred or Accelerated Examination: Applicants have the option to defer formality examination or request an accelerated substantive examination, depending on their needs.

How the Patent Box Can Drive Growth in Key Sectors

R&D-Intensive Industries

• Key sectors such as technology, life sciences, and manufacturing stand to gain significantly from the Patent Box regime.
• These industries, which rely heavily on IP development, can lower their tax liabilities and reinvest the savings into further innovation.

Creative Industries

• The government’s emphasis on IP trading is likely to stimulate growth in creative industries, further enhancing Hong Kong’s reputation as a regional hub for intellectual property.

Pharmaceuticals and Biotechnology

• For businesses in pharmaceuticals and biotechnology, where patents are crucial to product development, the Patent Box provides a clear strategic advantage.
• By aligning R&D efforts with the nexus approach and structuring IP operations to optimise tax savings, these companies can maintain competitiveness in a rapidly evolving market.

Where To Next?

The Hong Kong Patent Box regime offers a unique opportunity for businesses to enhance their competitiveness and invest in innovation. 

By providing one of the world’s most attractive tax incentives for IP income, the regime solidifies Hong Kong’s position as a global hub for IP trading and R&D. However, navigating the complexities of the patent box requires careful planning and compliance with strict eligibility criteria.

Contact InCorp Hong Kong today to explore how we can assist your business in making the most of the Hong Kong Patent Box. We offer specialised support in IP management and tax optimisation, helping businesses unlock the full potential of this innovative tax incentive.