Government refines proposed tax deductions for expenditures incurred on intellectual property rights

The major refinements include: (i) for domestic intra-group transfers, subject to the arm’s length principle, instead of allowing tax deduction based on the purchase price of the intellectual property rights (IPRs) transferred, while taxing the transferor on the full sales proceeds, including any capital gains, the proposed tax deduction is now restricted to the lower of (a) the relevant costs incurred by the transferor; or (b) the acquisition costs incurred by the transferee. The relevant costs incurred by the transferor would be the sum of the costs of the acquisition of the IPRs together with any qualified research and development expenditure incurred by the transferor on the IPRs; (ii) upfront licensing fees incurred for the right to use a franchise would be deductible to the extent that such fees are related to the eight types of IPRs covered by the proposed legislation; and (iii) for offshore royalty income derived from IPRs used by a licensee outside Hong Kong that is chargeable to tax in Hong Kong under the foreign-sourced income exemption regime, capital expenditure incurred on the acquisition of the IPRs would be tax deductible on a proportionate basis, i.e., such expenditure would be carved out from the scope of section 16EC(4)(b) of the Inland Revenue Ordinance.

The Government launched a two-month stakeholder consultation in the first quarter of 2026 on the proposals to allow tax deductions for (i) costs incurred on the purchase of eight types of IPRs from associates; and (ii) payments of upfront licensing fees, regardless of whether they are capital or revenue in nature, for the right to use any one of the eight types of IPRs.

Taking into account the feedback from stakeholders, the above refinements to the original proposals are outlined in a paper submitted to the Panel on Commerce, Industry, Innovation and Technology of the Legislative Council for discussion on 19 May 2026.

Clients should contact their tax executive if they have any questions or would like to discuss these developments further.