News & Insights

Thinking inside the (patent) box

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Authored by: Jamie Cheung

Did you know?

On 5 July 2024, Hong Kong enacted a “patent box” regime to encourage R&D and IP trading activities in the jurisdiction. The patent box provides tax concessions for qualifying intellectual property income. The regime enables qualifying taxpayers, deriving eligible income from certain types of intellectual property created through R&D activities, to pay profits tax at the concessionary rate of just 5% (compared to the usual 16.5% profit tax rate).

Why does this matter to you?

The regime is now in force and allows taxpayers to apply for the incentive starting from the 2023/2024 year of assessment.

The patent box is targeted at “traditional” science industries like biotechnology and electronics, in which patent protection is commonplace. Importantly, patent applications as well as granted patents are covered under the regime, including original grant patents, foreign patents (and patent applications) re-registered in Hong Kong, and short-term patents.

However, despite its name, the patent box covers not only patents, but also plant variety rights and copyright subsisting in software. This means that companies that invest in R&D that produces qualifying software, and the subsequent exploitation of that software to generate profits, could avail themselves of the new patent box regime.

Interestingly, fintech is an area that is specifically mentioned in the Inland Revenue Department’s guidance on the patent box. Of course, given Hong Kong’s status as an international financial centre, this may not be too surprising; but it aptly demonstrates the Government’s commitment to supporting the development of fintech in Hong Kong.

Perhaps less obvious is how the patent box can apply to creative industries. For example, could video game development qualify for the purpose of the patent box? For most video games, probably not – but we have seen new technologies emerge from video game development before. Guidance from the Inland Revenue Department states that certain software projects such as “designing complex data capture and analysis tools that require new technical solutions” and “handling application program interfacing where unknown program interactions require new technical solutions” are “likely qualifying R&D activities” for the purpose of the patent box. It should also be kept in mind that unlike some jurisdictions, in Hong Kong, software can potentially be protected by patents as well as copyright.

It should be noted that in order to qualify for these benefits, the IP must be generally developed internally by the taxpayer. If the R&D involves acquiring IP or certain outsourcing activities, the portion of profits eligible for the lower tax rate may be reduced. Additionally, for patents and plant variety rights, enterprises need to obtain local registration for their IP in order to enjoy the concession. This requirement will come into force two years after the “patent box” tax incentive comes into operation.

Will the new patent box boost Hong Kong’s R&D and creative sectors? Much remains to be seen, but one thing is clear: innovators must think outside the box in order to get into the patent box.

Want to know more?

Deacons’ Intellectual Property Department advises clients across the spectrum from innovation and creation to commercialisation on protecting, maintaining, and exploiting intellectual property. Please reach out to us to learn more.

Key Contacts

Catherine Zheng

Partner | Intellectual Property

Email or call +852 2825 9617

Jeffrey McLean (Jeff)

Partner | Intellectual Property

Email or call +852 2826 5320

Ian Liu

Partner | Intellectual Property

Email or call +852 2826 5360

Kelley Loo

Partner | Intellectual Property

Email or call +852 2825 9575

Theresa Luk

Partner | Intellectual Property

Email or call +852 2825 9482

Charmaine Koo

Consultant | Intellectual Property

Email or call +852 2825 9300

Eliza Siew

Counsel | Intellectual Property

Email or call +852 2826 5345

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