Home' A Plus Magazine : March 2013 Contents New tax deductions for capital
expenditure on intellectual
property create controversy
Tracy Ho and Patrick Kwong explain how certain views taken by the
Inland Revenue Department in its DIPN 49 create issues for deduction
claims under a recently gazetted amendment
Hong Kong tax
44 March 2013
he Inland Revenue (Amend-
ment) (no. 2) Ordinance of
2011, which grants tax deduc-
tions for capital expenditure
incurred on the purchase of three new
categories of intellectual property rights –
registered trademarks, copyrights and
registered designs – effective from the year
of assessment 2011-12, was enacted on 16
Under section 16EA added to the
ordinance by this new law, tax deductions
for the relevant costs would generally be
spread over five years, starting from the
year of purchase.
Apart from the new law, under the
existing provisions of section 16E, capital
expenditure incurred on the purchase of
patent and know-how rights is eligible
for a 100 percent immediate tax write-off
in the year of purchase provided that the
specified conditions are met.
In July 2012, the Inland Revenue Depart-
ment issued Departmental Interpretation
and Practice Note no. 49, stating its inter-
pretation and assessing practice in respect
of the new law. We discuss below some of
the views made by the IRD in the note.
Pending registration on date of acquisi-
tion not qualified for tax deduction
The note states that patents, designs or
trademarks must be registered (in Hong
Kong or overseas) on the date of acquisition
before they can qualify for the tax deduction.
As a result, where a vendor’s registration of
the relevant patents, designs or trademarks
has not been successfully completed and is
only pending on the date of the transaction,
the costs incurred by the purchaser for ac-
quiring the same will not qualify for any tax
deduction. This is the case even where the
purchaser has subsequently completed the
vendor’s application and has the relevant
patents, designs or trademarks register in
the purchaser’s name.
Only allow for the registration of
assignment in process
Nonetheless, the IRD recognizes that it takes
time to change the name of the registration
from the vendor to the purchaser after the
purchaser has acquired the relevant patents,
designs or trademarks. The note states that
the purchaser would be allowed the tax
deduction on the condition that:
(i) The relevant patents, designs or trade-
marks have already been successfully
registered by the vendor with the relevant
authorities on the date of acquisition; and
(ii) The purchaser has already submitted
applications for registering the relevant
patents, designs or trademarks in their
No registration requirement for copy-
rights and know-how rights
There are generally no registration systems
in place for copyrights and know-how rights
in either Hong Kong or overseas. Therefore,
the law does not require that copyrights
and know-how rights have to be registered
before a tax deduction can be granted. The
note states that the IRD will examine the
relevant sale and purchase agreement in or-
der to ascertain whether the relevant rights
acquired are copyrights or know-how rights.
Use of an intellectual property right
where registration is territorial and
apparently only active exploitation of the
same is regarded as being “used”
Under both sections 16E and 16EA, tax
deductions will only be granted if a relevant
intellectual property right is used in the
production of profits chargeable to tax in
Hong Kong. Therefore, what constitutes
“use” of the relevant intellectual property
right is crucial for the tax deduction claims.
Example 5 of DIPN 49 as reproduced below
illustrates the issues highlighted.
Example 5 from DIPN 49
Company HK purchased a trademark at a
total consideration of HK$1 million, which
has been registered in Hong Kong and the
United States from a U.S . company.
The Hong Kong registered trademark
and U.S . registered trademark are valued
at HK$600,000 and HK$400,000 respec-
tively. In the year of purchase (i.e. Year 1),
sales of the branded goods were made to
Hong Kong customers only.
In the following year (i.e. Year 2), Com-
pany HK set up a branch office in the U.S .
for sale of branded goods to U.S . customers.
The profits derived by the U.S . branch office
are chargeable for Hong Kong profits tax.
The table shows the amount of tax de-
duction as stated in DIPN 49 that Company
HK can claim in respect of the trademark
registered in both Hong Kong and the U.S .
in Year 1.
The point to note from this example is
that a tax deduction for the purchase cost of
the U.S . registered mark would be denied
in Year 1 on the basis that the U.S . registered
mark was not used by Company HK, there
being no U.S . sales of the branded goods
made by Company HK in Year 1.
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