With reference to our newsletter issued on 26 September 2011 about the Government budget proposal of tax deductions for registered trademarks, copyrights and registered designs, a new Departmental Interpretation and Practice Note No. 49 (“the DIPN49”) was issued by the Hong Kong Inland Revenue Department (“the IRD”) in July 2012 after the legislator pass the Inland Revenue (Amendment) (No. 3) Ordinance 2011 (“the 2011 Amendment Ordinance”) in December 2011
The purpose of the DIPN49 is to set out in detail the Department’s views and practice on the profits tax deduction relating to the purchase of patent rights, rights to know-how, copyrights, registered designs and registered trade marks (hereinafter collectively referred to as “the Relevant Rights”) following the enactment of the 2011 Amendment Ordinance.
The 2011 Amendment Ordinance includes three major amendments to section 16E of the Inland Revenue Ordinance (“the IRO”) and they are further discussed below:
- To remove the “use in Hong Kong” condition
With the globalisation of the world economy, business activities are no longer confined to Hong Kong. On this premise, the “use in Hong Kong” condition imposed by section 16E(1) on the deduction for patent rights and rights to any know-how is removed. In other words, capital expenditure on the purchase of patent rights and rights to any know-how would be deductible irrespective of whether they are used in Hong Kong so long as other deduction conditions are satisfied and that the deduction is not otherwise precluded under the provisions of section 16EC.
- To cap the sales proceeds that should be brought to tax
Before the enactment of the 2011 Amendment Ordinance, the full amount of sales proceeds would be brought to tax upon sale of the patent rights and rights to know-how for which deductions have been previously allowed. However, this is not in line with Hong Kong’s policy of not taxing capital gains. As such, section 16E was amended to the effect that the sales proceeds of patent rights and rights to know-how to be brought to tax should not exceed the deductions previously allowed (section 16E(3)).
- To specify legal expenses and valuation fees as deductible expenditures
For the avoidance of doubt, section 16E(1A) was added to provide explicitly that deduction would be available under section 16E(1) for legal expenses and valuation fees incurred in connection with the purchase of patent rights and rights to any know-how.
The enactment of the 2011 Amendment Ordinance keeps Hong Kong as one of the most attractive place to set up its business
Please visit the following site for the full version:
The 2011 Amendment Ordinance : http://www.ird.gov.hk/eng/pdf/e_gazette_161211.pdf
The DIPN49 ：http://www.ird.gov.hk/eng/pdf/e_dipn49.pdf