Hong Kong R&D Tax Incentives - Can Tax Paid Six Years Ago Still Be Refunded?

A few days ago, I was having tea with a fellow professional when he asked me a question:

A company had been carrying out genuine R&D in Hong Kong for several years and had dutifully paid Profits Tax at 16.5% every year — was some of that tax never actually due?

I said yes—and quite a lot, in some cases. The problem is that most owners of small and medium-sized businesses in Hong Kong do not even realise that this option is available to them. The Inland Revenue Department (IRD) will not knock on your door to remind you about R&D tax incentives, and your accountant may not proactively raise them either.

Today, rather than discussing legislation, I will focus on three practical questions: What R&D incentives does Hong Kong offer? Does your company qualify? And, most importantly, how can you claim them without leaving money on the table?

1. Two Incentives: One for Spending and One for Earning

Let us begin with the overall framework. Hong Kong’s R&D incentives are actually two separate regimes that apply at different stages: when you “spend money on R&D” and when you “earn income from R&D results.”

One for Spending and One for Earning
 

Table 1: Comparison of Hong Kong’s Two R&D Tax Incentive Regimes

Enhanced Tax Deduction: Claim More When You Spend

This is commonly known as the “enhanced tax deduction.” Put simply, the IRD allows qualifying R&D expenditure to be deducted at a multiple of the actual amount. A larger deduction reduces assessable profits and, therefore, the tax payable.

Hong Kong divides R&D expenditure into Type A and Type B:
 

Table 2: Categories of R&D Expenditure and Deduction Rates

The dividing line between Type A and Type B can be summarised in one sentence: the R&D activities must be carried out in Hong Kong to qualify as Type B expenditure.

The work must either be performed by your own Hong Kong R&D team or outsourced to a Designated Local Research Institution (DLRI) recognised by the Hong Kong Government.

A Simple Example

Suppose your company spends HK$2 million on R&D in a year and earns a profit of HK$5 million:

Without claiming the incentive, assessable profits would be HK$5 million. At a tax rate of 16.5%, the tax payable would be HK$825,000.

If the entire HK$2 million qualifies for the Type B enhanced deduction, the deduction would be HK$6 million (HK$2 million × 300%). Assessable profits would therefore fall to negative HK$1 million. No tax would be payable for the year, and the HK$1 million tax loss could be carried forward to offset future profits.

The more qualifying R&D expenditure a company incurs, the more it can save. That is why I say many companies have been paying tax they did not need to pay.

Patent Box Regime: Pay Less Tax When You Earn

Hong Kong’s “Patent Box” regime formally took effect in July 2024.

In one sentence: the Profits Tax rate on qualifying intellectual property (IP) income is reduced directly from 16.5% to 5%. Three types of IP qualify—patents, copyrighted software and new plant variety rights. The 5% rate is not limited to licence fees; it may also apply to the portion of a product’s sale price attributable to embedded IP value.

A Regional Comparison
 

Table 3: Comparison of Patent Box Tax Rates

Hong Kong offers not only a low rate, but also no sunset clause and no prior approval requirement. During the transitional period, the relevant IP may be registered anywhere in the world.

2. The Most Valuable Opportunity: Look Back Six Years

The incentives described above are only the obvious part. What follows is the part most likely to make business owners regret not acting sooner.

When business owners first hear about R&D incentives, their usual reaction is, “Then I will start claiming from this year.” That is often the least advantageous approach.

A Regional Comparison
 

Table 3: Comparison of Patent Box Tax Rates

Why is starting only from this year the more passive option?

The IRD’s usual approach is to “trust first”—it initially assesses tax based on the return you file. However, it may review the claim two or three years later. If it concludes that the company did not qualify, the company may have to pay the undercharged tax together with surcharges or penalties. For a long period, you may therefore have no certainty as to whether the claim will ultimately be accepted.

Hong Kong tax returns for the previous six years may, however, be revised. If your company has been conducting R&D during those years but did not claim the enhanced deduction in the original returns, you may still have an opportunity to recalculate those years and obtain an actual cash refund.

R&D that was genuinely carried out leaves records that can be verified and traced. This retrospective approach therefore offers the highest degree of certainty.

Based on my experience, a practical threshold is that the company should have paid at least HK$1 million in aggregate Profits Tax over the past six years before a refund claim is likely to be commercially worthwhile. Below that level, the work involved may be disproportionate to the tax savings.

3. Not Profitable Yet? Build Up the Tax Losses

Another common situation is a start-up that has not yet generated profits in Hong Kong. Owners often ask: “In that case, R&D incentives have nothing to do with me, right?”

Quite the opposite. Hong Kong tax losses may be carried forward indefinitely, with no expiry date. Accordingly, if you spend HK$2 million on R&D this year and the Type B deduction creates a HK$6 million tax loss, that HK$6 million is effectively placed in a “tax savings account” that remains with the company until future profits have fully absorbed it.

Suppose the company spends HK$2 million on R&D this year and begins earning HK$2 million a year from next year
 

Table 5: Illustration of Tax-Loss Carryforward

The company would pay no tax for three consecutive years and would only begin paying tax after the losses had been fully utilised. For a technology start-up that is currently burning cash but expects revenue to rise soon, this can be a highly favourable cash-flow arrangement.

4. Will the IRD Really Accept That Your Work Is “R&D”?

This brings us to the most practical issue. The incentives are attractive, but the IRD’s standard for determining whether an activity constitutes “R&D” is stricter than many Mainland Chinese business owners expect.

In Mainland China, developing an app, improving a process or launching a website may often be included in an enhanced deduction claim if sufficient supporting materials are prepared. Hong Kong is different: its review is clearly more stringent and generally focuses on three areas.

First Test: Were the People Actually in Hong Kong?

This is the clearest red line. The IRD does not focus on whether a person is a permanent resident or what identity card they hold. It looks at one thing—their entry and departure records maintained by the Hong Kong Immigration Department.

Many companies pay salaries in Hong Kong and appoint Hong Kong directors on paper, while the relevant individuals actually spend most of the year in Mainland China. In that situation, the requirement that the “R&D be carried out in Hong Kong” would not be met for Type B purposes. 

It is worth assessing, at the outset, how many days the core R&D personnel actually spent in Hong Kong during the past year and whether the facts support the statement that the R&D was mainly conducted in Hong Kong.

Second Test: Does the Work Involve Genuine “Innovation”?

The IRD’s implicit question is whether you can demonstrate that the work is technically significant. This is the area most often misunderstood, so the comparison below may help:
 

Table 6: Activities Likely and Unlikely to Qualify as R&D

The key is not whether the project ultimately succeeds or fails—R&D can, of course, fail—but whether the work involves genuine technological uncertainty and innovation.

Third Test: What Was the Money Spent On?

Qualifying R&D expenditure generally falls into three categories: salaries of in-house R&D personnel, consumable materials used in experiments and testing, and fees paid to Designated Local Research Institutions.

The third category deserves particular attention. If a project is commissioned to one of Hong Kong’s eight publicly funded universities or another designated research institution for collaborative R&D, the entire service fee will generally be treated as qualifying expenditure without the IRD having to break down, for example, how much of a HK$2 million fee relates to equipment and how much relates to manpower.

The IRD may simply ask whether the project was conducted entirely in Hong Kong or partly in Hong Kong and partly in Mainland China. If the split was 50:50, only half of the expenditure would qualify for the incentive. The location of the project therefore needs to be considered at the planning stage.

5. The Unavoidable Patent Box “Nexus” Requirement

The Patent Box regime contains a slightly technical but unavoidable concept known as the “nexus requirement.”

The principle is straightforward: the portion of IP income eligible for the 5% rate must be linked to R&D genuinely carried out in Hong Kong. The more R&D that is performed locally, the greater the proportion of income that may enjoy the 5% rate. Conversely, if a patent was acquired from elsewhere or the R&D was outsourced to an associated company outside Hong Kong, the amount eligible for the concession will be reduced accordingly.

Put plainly, the rule is intended to prevent companies from moving a patent that was already developed overseas to Hong Kong in name only in order to obtain the 5% rate. Hong Kong wants businesses that conduct substantive R&D locally—not entities that merely “park” their IP here.

For companies with incomplete historical records, a three-year rolling average may be used for the years of assessment 2023/24 to 2025/26 as a transitional measure. Over the longer term, however, proper records and supporting documents for local R&D must be retained.

6. Which Companies Should Act Now?

Returning to the question at the beginning: who should pay close attention to these incentives? A detailed assessment is worthwhile if any of the following applies to your company:
 

⮚    It paid more than HK$1 million in aggregate Profits Tax over the past six years.

⮚    It owns patents or copyrighted software.

⮚    It is currently burning cash but expects revenue to grow soon.

⮚  Its core R&D team genuinely works in Hong Kong, with entry and departure records that can withstand scrutiny.

After many years in this field, my strongest conclusion is this: the real value of a professional team in an R&D incentive claim does not lie in completing the tax return—that is the least valuable step. The real value lies in explaining to an IRD assessor who may have no technical understanding of your R&D why the project qualifies, and presenting the case clearly enough for the IRD to accept it.

Hong Kong’s R&D incentives are among the most generous features of its tax system. At the same time, they impose some of the highest demands for advance planning and contemporaneous evidence. Do not wait until the tax return arrives and the tax has already been paid before thinking about them.