What are the intellectual property rights of taxpayer having company formation HK under different sections of Inland Revenue Ordinance?

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   

• Rights to any know-how under Section 16E (4).
• Rights of patents.

It started begin from 1982/83.

Identified Intellectual Property Rights

• Registered trademarks
• Copyrights
• Registered designs

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:

• At the hour of sale; or
• If the sale happens on or after the date on which the profession, trade or business is discontinued permanently, with immediate effect before the discontinuance (former Section 16 E (3)).

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:

• Where at any hour before the time i.e., 16 December, 2011, a taxpayer rendering Hong Kong incorporation services who has been utilizing the right under a license, terminates the license before its expiry date occurs and buys the relevant intellectual property right at some non-reasonable consideration under Section 16 EC (1).
• Where the relevant intellectual property right is bought partly or wholly from an affiliated party. Any relevant intellectual property right that is sold or bought by a trustee is considered to have been sold or purchased by every trustee, the beneficiary and the corporation under trust. The reference for these statements is taken from the Section 16 EC (2) and (3).   
• Where any relevant intellectual property rights bought by a taxpayer providing Hong Kong company setup service, if at that time when the relevant intellectual property right is acknowledged by the taxpayer, a person carries rights as a licensee under a relevant right’s license, and:
• The relevant intellectual property right is, while the license is effective, utilized principally or wholly outside the Hong Kong by an individual other than taxpayer under Section 16 EC (4) (b); or (c) the complete or an ascendant part of the supposition of the purchase of the relevant intellectual property right was capitalized indirectly or directly by a non-resource rent under Section 16 EA (4) (c); and
• The relevant intellectual property right is, before it is bought by the taxpayer providing Hong Kong company setup service, possessed and used by that person (whether with others or alone) or any affiliate of that person (which person or any that type of affiliate is referred to as the end user in this section) under Section 16 EC (4) (a). 

Section 16 EC (4) (a) of Inland Revenue Ordinance is not applicable if:

• The relevant intellectual property right was bought from the end-user by the taxpayer having set up Hong Kong limited company with a possibility not more than the consideration paid to the supplier by the end-user for purchasing the relevant intellectual property right from the supplier (not a supplier who is also an end-user); 
• The acquisition referred to in previous paragraph from the supplier by the end-user occurred after or on the date 16 December 2011; and
• No deduction under the Section 16 E or 16 EA has been allowed in respect of the relevant intellectual property right to the end-user at any time before the procurement of the relevant intellectual property right by the taxpayer under Section 16 EC (5).

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:

• Within an additional duration that the CIR may in any specific case allow; or
• Within a specified duration of 3 months commencing on the day on which the expense that are capital in nature in experienced in relation to the applicable intellectual property right giving rise to the withdrawal.

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:

Copyright       

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:

• Remains under the law of a location outside Hong Kong in any labor in which a copyright mentioned to in paragraph (a) may remain and
• Corresponds to a copyright mentioned to in previous paragraphs. In accordance with the Section 16 EA (11).        

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).   

Patent Rights 

To perform or authorize the function of anything that would entitle a violation of a patent in accordance with the Section 16 E (4). 

Registered Design  

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).

Recorded Trademark   

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:

• Are limited predominantly or wholly to all or any of the following:
• Rights (comprises a right to moneys payable) concerning to the related right or the use of the related right;
• Rights (comprises a right to moneys payable) concerning to services or goods that are generated;
• Rights (comprises a right to the moneys payable) concerning to the disposal or loss of the part or whole of:
• The pertinent right; or
• The interest of the taxpayer in the relevant right;
• Rights concerning the contract or security other than that over the pertinent right;
• Rights being raised out of any arrangement relating to the obligations of finance for the end-user of the related right;
• In the opinion of CIR are capable of being restricted as having considered to both or either of the following:
• The taxpayer’s asset;
• Any disposition to which the taxpayer is an alliance; or
• If are restricted by reason that not each asset of the taxpayer (not the assets that are security for a indebtedness of the of the taxpayer other than an indebtedness being raised in relation to the funding of the part or whole of the consideration for the procurement of the pertinent right) would be accessible for the reason of the discharge of the complete debt arising in this way (comprising the payment of interest) in the event of actions or any single action by the creditors or creditor against the taxpayer, being raised of the indebtedness. The reference for these statement is taken from the Section 16 EC (8).