Hong Kong gazettes Bill to widen IP expenditure tax deductions

Enterprises that buy intellectual property rights from group affiliates, hold IP used by licensees outside Hong Kong, or pay upfront licence fees will be able to deduct the related capital expenditure under profits tax if the Inland Revenue (Amendment) (Tax Deductions for Intellectual Property Expenditure) Bill 2026IRD is enacted as gazetted.IRD The Government gazetted the Bill on 16 October 2026IRDIRD to give effect to measures announced in the 2025-26 and 2026-27 Budgets, with the stated aims of lowering IP transaction costs, facilitating IP trading and supporting knowledge-intensive industries in Hong Kong.

The first change opens deductions for purchases of eligible IP rights from associates, such as group affiliates.IRD Enterprises incurring capital expenditure to buy eligible IP rights from an associate will be able to claim a profits-tax deduction for it.IRD The policy purpose is to encourage multinational enterprises to centralise their IP management in Hong Kong and to facilitate domestic intra-group transfers and business activities. This reverses the current bar: under the Inland Revenue Ordinance no deduction is allowable under section 16E or 16EA for a relevant right purchased wholly or partly from an associateElegislation.

The second change covers eligible IP rights used by a licensee outside Hong Kong.IRD Where the licensing income from those rights is regarded as arising in or derived from Hong Kong under the foreign-sourced income exemption regime and is chargeable to profits tax in Hong Kong, the capital expenditure incurred to purchase the rights may be allowed as a deduction on a proportionate basis.IRD Groups holding Hong Kong-owned IP that is exploited offshore, but whose licensing income falls within the Hong Kong profits-tax net, should therefore test whether the purchase cost becomes partly deductible.

The third change allows deductions for upfront licence fees.IRD Enterprises paying an upfront fee for the use of eligible IP rights under a licensing arrangement will be able to claim a deductionIRD, a step aimed at encouraging IP development and commercialisation. This also departs from the current position: section 16E(9) states that expenditure on acquiring a licence of patent rights or know-how rights is not deductible under section 16EElegislation, and section 16EA(13) states the same for licences of specified intellectual property rightsElegislation.

The relaxed arrangements will apply to contracts entered into on or after 1 April 2026IRD for the purchase of eligible IP rights or for the licence to use eligible IP rightsIRD, so transactions already signed since the start of April fall within the announced scope if the Bill passes in its current formIRD.

The Bill pairs the wider deductions with safeguards for the tax base. Purchases of IP rights from associates will be subject to a main purpose test.IRD The Bill also provides for how the deduction amount is calculated for capital expenditure on purchases from Hong Kong associates, and it requires a third-party independent valuation report to substantiate the deduction claim where the capital expenditure on purchasing eligible IP rights from non-Hong Kong business associates, or on acquiring a licence from associates for the use of eligible IP rights, exceeds a specified thresholdIRD, so as to prevent excessive deductions.

The Bill is due for First Reading and Second Reading in the Legislative CouncilIRD on 28 October 2026IRD. Tax teams considering intra-group IP transfers, offshore licensing structures or new licence agreements should track its passage, since the deductions are not yet lawIRD. Legal basis: the Inland Revenue (Amendment) (Tax Deductions for Intellectual Property Expenditure) Bill 2026, gazetted on 16 October 2026, relaxing the IP-related tax deduction arrangements.