The Government has proposed granting tax deductions for capital cost incurred on the purchase of registered trademarks, copyrights and registered designs, so as to promote a wider application of intellectual property rights by enterprises and the development of creative industries in Hong Kong. Hence, the government gazetted the Inland Revenue (Amendment) (No.2) Bill 2011, which propose to add three new sections, namely 16EA, 16EB and 16EC, to the Inland Revenue Ordinance (“IRO”). Currently, tax deductions are only limited to two categories of intellectual property rights, patent and industrial know-how. Taxpayers can claim a 100 percent tax write-off for these rights in the year of purchase. The summary of the three new sections as follow:
Proposed Section 16EA
Under the proposed section 16EA, capital expenditure, including the relevant legal and valuation fees, incurred on the purchase of registered trademarks, copyrights and registered designs used in the production of profits chargeable to tax in Hong Kong would be deductible. It applies for the trademarks and designs being registered in either Hong Kong or overseas.
Tax deduction for expenditure is to be spread over five succeeding years on a straight-line basis commencing from the year of purchase. (or spread over a shorter period if the maximum period of protection of the copyrights and designs expires in less than 5 years on a straight-line basis.)
Where the relevant intellectual property right is only used partly in producing profits chargeable to tax in Hong Kong, the relevant tax deductions would have to be proportionately allowed.
Where more than one relevant intellectual property right is purchased or sold together, or with any other asset, for a single consideration, the commissioner may, having regard to all the circumstances of the transaction, allocate a consideration for the purchase or sale of each individual asset for the purpose of granting or making the relevant tax deductions or balancing adjustments.
If the commissioner is of the opinion that the consideration for the purchase or sale of a relevant intellectual property rights does not represent its true market value, the Commissioner may determine the true market value of such right. The amount would then be treated as the cost or sale proceeds of the relevant right for the purposes of granting or making the relevant tax deductions or balancing adjustment purposes.
Proposed Section 16EB
Under the proposed section 16EB, any of the captioned rights is sold and the purchase cost has been claimed as deductible, the relevant sale proceeds would be compared with the balance of the costs of the right not yet deducted. Where the sale proceeds exceed the then unallowed costs, the difference would be chargeable to tax as a form of balancing charge in the year of disposal. The balancing charge is limited to the total amount of tax deductions previously claimed. If the unallowed costs exceed the sale proceeds, the difference would then be allowed as a further tax deduction as a form of balancing allowance in the year of disposal.
Where a relevant intellectual property rights has been used only party for the production of the profits chargeable to tax in Hong Kong and partly for other purposes, the balancing adjustments would be proportionately taxable.
Where the sale of a relevant intellectual property right occurs after the discontinuance of a trade, profession or business, there is a specific provision deeming the sale as occurring immediately before the discontinuance of the trade, profession or business for the purposes of making the balancing adjustments.
Proposed Section 16EC
Under the proposed section 16EC, it concerns the related anti-avoidance provisions. Deductions are denied
(1) if the purchase of a relevant intellectual property right is from an associate;
(2) if sale and purchase is under sale-and-license-back arrangement between associated persons;
(3) if the licensee (whether associate with the licensor or not) uses intellectual property rights are wholly or principally outside Hong Kong, under normal licensing not involving a sale-and-license-back arrangement;
(4) if the whole of predominant part of the purchase consideration on a relevant intellectual property right is financed directly or indirectly by a non-recourse debt;
(5) if the license terminates a licence before its expiry date and purchases the relevant intellectual property rights from licensor at an unreasonable consideration, where the intellectual property rights have already been used under a licence before the commencement of the proposed deduction
The Inland Revenue (Amendment) (No.2) Ordinance 2011 is not yet enacted. Transitional provisions is set out concerning the above new sections that have effect, do not apply for any year of assessment preceding the year of assessment beginning on 1 April 2011.
The publication contains information in summary form and is therefore intended for general guidance only. This publication is not intended as legal, accounting or other professional advice and should not be relied upon as such. If legal, accounting or other professional advice or expert assistance is required, the services of a competent professional should be sought. Neither Reanda Lau & Au Yeung nor any related entity shall have any liability to any person or entity that relies on the information contained in this publication.