Research & Development (R&D)Patent Box Tax Incentive
The Hong Kong Patent Box Tax Incentive, effective from the year of assessment 2023/24, offers a preferential tax rate of 5% on qualifying intellectual property income, significantly reducing corporate tax burdens and greatly encouraging R&D activities in Hong Kong. The aim is to the creation and commercialization of new intellectual property (IP).
In order to meet the requirements of the Patent Box Tax Incentive, the enterprises need to:-
Ø Make sure that the IPs originate from specific R&D activities. Additionally, they must meet the local registration requirements in Hong Kong, particularly within a 24-month period after the commencement of the program;
Ø Maintain proper records and accurately track their R&D expenditures to precisely calculate the nexus ratio;
Ø Elect to apply for this tax incentive through the profits tax return.
Tax Incentive for Research & Development (R&D) – 200% / 300% Enhanced Tax Deduction
With a view to encouraging more enterprises to conduct R&D activities in Hong Kong, Hong Kong had already introduced the Enhanced R&D Tax Deduction regime in the year of assessment 2018/19.
There are two kinds of R&D expenditures:-
Ø Type A expenditures which are eligible for the standard tax deduction of 100% of the expenditure amount;
Ø Type B expenditures which are eligible for the enhanced tax deduction at 300% for the first HK$2 million and 200% for the remaining amount.
The expenditures which qualify as Type A and Type B expenditures are set out in the table below:-
Type A expenditure | Type B expenditure |
Ø any expenditure directly related to R&D activities, excluding Type B expenditure. This includes payments made to R&D institutions. If certain conditions are met, this type of expenditure is eligible for a 100% tax deduction. The R&D activities can be conducted in or outside of Hong Kong. | Ø Qualifying expenses related to employees and consumable items incurred for internal R&D activities; or Ø Payments made to a designated local research institution (DLRI) for outsourced R&D activities. If certain conditions are met, this type of expenditure qualifies for an enhanced tax deduction. Specifically, the first HKD 2 million is deductible at 300%, and the remaining amount is deductible at 200%, with no cap on the deduction amount |
Companies engaging in or planning to engage in R&D activities should review their R&D activities and assess whether they can benefit from the regime.
Key Requirements
In order to obtain the R&D tax benefits, ALL of the relevant R&D activities have to be carried out physically in Hong Kong.
How to apply
Taxpayers should apply for the above tax benefits in their annual Hong Kong Profits Tax filing and fill in Supplementary Form S3.
Services Offered by Our Tax Experts
We can assist you on the following services
ü Advise on conditions and documentation for applying for the Patent Box Tax Incentive and Enhanced Tax Deduction for R&D with practical implementation plan;
ü Assist in applying for relevant tax benefits;
ü Filling in of Supplementary Form S3 of Profits Tax return;
ü Lodging Advance Ruling Application to the Inland Revenue Department (IRD); and
ü Replying to the Inland Revenue Department (IRD) enquiry letter.
