In this blog we will explore one important specific deduction under profit tax calculation for expenses i.e., intellectual property rights of taxpayer. We will discuss the treatments of tax for different type of IPR rights such as sale of relevant IPRs, period of tax deduction and anti-avoidance provisions etc. We will also be analyzing that how taxation policy of Hong Kong applies on these different intellectual property. For this discussion we will be referring to the different Sections of the Inland Revenue Ordinance. We will also discuss legal meanings of some technical terms such as copyright, patent rights and registered trademarks.
Rights on Intellectual Property under Section 16E, 16EA, 16EB and 16EC of Inland Revenue Ordinance
For the purchasing of certain intellectual property rights, the deductions of tax are available under Section 16E and 16EA of Inland Revenue Ordinance. In the given below there is summary of tax treatments for different kinds of intellectual property rights:
Types of relevant Intellectual Property Rights
It started begin from 1982/83.
Identified Intellectual Property Rights
In accordance with the Section 16 EA (11). It started begin from 2011/12
Terms for the Withdrawal before the Assessment Year 2011 / 12
Expense experience on the purchase of an intellectual property right (other than any gross that is permissible as a withdrawal apart from the Section 16E) for utilization in the generation of chargeable profits in the Hong Kong (former Section 16 E (1)). The remuneration has to be allocated when the intellectual property rights is partly for the worth in Hong Kong.
No withdrawal is available if the intellectual property right is bought partly or wholly from an affiliate (former Section 16 E (2A)).
Taxation of the Sale Progresses before the Assessment Year 2011 / 12
Where an intellectual property right concerning of which a withdrawal has been allowed under Section 16 E (1) is sold subsequently, the applicable proceeds of the sale tended as a receipt of trading accruing:
The gross considered to be a receipt of trading can increase the amount of withdrawal allowed previously.
General Conditions for the Deduction as from the Assessment Year 2011 / 12
Proprietary interest such as economic and legal ownership of the relevant intellectual property right which must have been acquired by the taxpayers having company formation HK. The relevant intellectual property rights are in worth for the generation of evaluate able profits.
Where a relevant intellectual property right is used in the generation of profits that are chargeable, withdrawal is only allowed for the part of expense that is capital in nature and is relevant to the generation of such evaluate able profits under Sections 16 E (2) and 16 EA (7). Where a relevant intellectual property right is acknowledged by more than one taxpayer rendering Hong Kong incorporation services, the withdrawal of tax is given for each taxpayer for the amount of capital expense that is corresponding to his / her share in the relevant intellectual property right.
Fees of valuation and the legal expenditure experienced in connection with the buying of the relevant intellectual property right are evaluate able given that such expense is not deductible under any other allowance of the Inland Revenue Ordinance. The reference for these statements is taken from the Section 16 E (1A).
Particular Terms for the Deductions as from the Assessment Year 2011 / 12
For only the ‘registered trademark’ and ‘registered designs’ the deduction is permissible. These two types of intellectual property rights must have been recorded in the Hong Kong or in foreign on the acquisition date.
The Period of Tax Deduction
Withdrawable in the year of purchasing in accordance with the Section 16 E (1). Withdrawable over 5 consecutive years on a ground of straight-line from the year of purchase under Section 16 EA (3). In the particular scenarios where a specified intellectual property right reaches the termination of its maximum period of armor within the 5-year withdrawal period, the withdrawal will be span in equal remunerations over the number of years during which it survives the guard of the particular intellectual property right under Section 16 EA (4).
Sale of the relevant Intellectual Property Rights
Where a relevant intellectual property right is sold subsequently, the sale progresses to be tended as receipt of trading are crowned at the amount of withdrawal as allowed previously under the Sections 16 E (3) and 16 EB (2).
Provisions of Anti-Avoidance
Deductions will not be permitted under one or more than other circumstances given below:
Section 16 EC (4) (a) of Inland Revenue Ordinance is not applicable if:
For the reasons of the Section 16 EC (5), a withdrawal is considered as not to have been done if the end-user, by in writing notice to the CIR:
Terms used in IPR and their Meanings:
The legal meanings of some practical terms relating to the relevant intellectual property rights can be understand from the given below:
According to the Section 2 (1) the meaning of the copyright, including a non-registered correspondence design as determined in accordance with the Section 87 (5) (b); or
Any entitlement that:
Any industrial techniques or information likely to remain in the processing or manufacturing of the materials or goods in accordance with the Section 16 E (4).
License in relation to a relevant Intellectual Property Right
A license (however drawn and whether limited or general) permitting the licensee to use the pertinent right in the manner acknowledged by the license; but
Does not enter into agreement under which the possession of the pertinent right may be or will pass to or sold to the licensee unless, in the opinion of CIR, the right under the accord to obtain or to purchase the possession of the pertinent right would be expected reasonably not to be exercised, and the licensee accordingly is to be constructed in accordance with the Section 16 EC (8).
To perform or authorize the function of anything that would entitle a violation of a patent in accordance with the Section 16 E (4).
A design recorded under the Section 25 of the Registered Designs Ordinance or under the rule of any location outside the Hong Kong in accordance with the Section 16 EA (11).
A trademark recorded under the Section 47 of the Trade Marks Ordinance or under the rules of any location outside the Hong Kong in accordance with the Section 16 EA (11).
The Debt having no Resource
A debt where the entitlements of the creditor in the default event in the payment of interest or repayment of the principal: