On 28 October 2026, the Secretary for Commerce and Economic Development of the Hong Kong Special Administrative Region moved the second reading of the Inland Revenue (Amendment) (Tax Deductions for Intellectual Property Expenditure) Bill 2026 in the Legislative Council. The Bill amends the Inland Revenue Ordinance (Cap. 112) to moderately relax the tax deduction regime for capital expenditure incurred by enterprises on purchasing intellectual property or acquiring licences to use IP. It implements a measure announced in the 2025/26 and 2026/27 Budgets.
The Bill proposes tax deductions for three types of capital expenditure on eight categories of qualifying IP. First, the purchase of qualifying IP from associates, intended to encourage multinational enterprises to centralise IP management in Hong Kong. Second, the purchase of qualifying IP for licensees to use outside Hong Kong, aligned with the foreign-sourced income exemption regime introduced in 2023: where licence income is chargeable to profits tax in Hong Kong under that regime, the acquisition cost becomes deductible in proportion. Third, prepaid licence fees paid under licensing arrangements.
To protect the tax base and prevent abuse, the Bill includes safeguards. Deductions are denied where obtaining a tax benefit is a main purpose, or one of the main purposes, of a purchase from an associate. A prescribed method determines the deductible amount for intra-group acquisitions from Hong Kong business associates. Independent third-party valuation reports are required for purchases from non-Hong Kong business associates, or where expenditure exceeds the prescribed threshold. The proposals apply to relevant contracts entered into on or after 1 April 2026.
For enterprises using Hong Kong as an IP holding, management and licensing platform, the reform should expand the range of deductible capital expenditure and lower the tax cost of intra-group transfers and licensing. Before signing significant IP transactions, assess the valuation report requirement and the main-purpose test in advance, and base accounting and filing treatment on the final enacted provisions and the Inland Revenue Department's official guidance once the Bill is passed. The Bill remains before the Legislative Council, and its progress is subject to official announcements. We can assist in evaluating structures and filing positions.