Hong Kong legislated new law to emerge as an intellectual property hub

Hong Kong generally only taxes prots derived from a source within its jurisdiction. Coupled with its general exemption for capital gains, Hong Kong has been the regional hub for cross border trades and businesses since World War II. Such beauty adds on its geographical vicinity and cultural nexus to Mainland China to render it the main gateway to the booming market of the latter. 

For profits derived from a source in Hong Kong, the tax rate is currently 16.5%, among the lowest in the region and globally. 

In recognition that innovation and application of technology add value to products and services and to facilitate the development of creative industries, Hong Kong recently legislated to allow deduction against profits for costs incurred in acquiring copyrights as well as registered designs and trademarks. The costs are deductible in equal amounts over five years or, if the period during which the right in the property may subsist is shorter, over that period. The deduction is proportionately disallowed if part of the income derived from the use of the properties is not chargeable to tax in Hong Kong. 

Following the legislation, the Inland Revenue Department also clarified its view on taxation of royalty, the consideration for the use of intellectual properties. 

If the intellectual properties is purchased and licensed for use outside Hong Kong, the royalty income so derived is not taxable. Thus an owner of intellectual properties in high tax jurisdictions might sell its intellectual properties to a Hong Kong subsidiary for onward licensing to the end users in other jurisdictions to make use of the exemption. 

If an intellectual property is created or developed in Hong Kong, the royalty received from allowing other persons to use the property is taxable in Hong Kong at 16.5%. Hence intellectual properties may be created or developed in Hong Kong and then licensed for use in a high tax jurisdiction. 

Hong Kong charges no withholding tax on repatriation of profits to foreign shareholders.

Proper procedures needed to be complied with and the taxation in the holding company’s as well as the end users’ jurisdictions should be evaluated by appropriate professionals before putting into place the aforesaid structures. 

Advanced ruling may be obtained from the Inland Revenue Department.