On 16 October 2026, the Hong Kong Government gazetted the Inland Revenue (Amendment) (Tax Deductions for Intellectual Property Expenditure) Bill 2026. If passed, it will relax three key areas of IP capital expenditure deduction — purchases from associates, offshore use by licensees, and upfront licence fees. First and second readings at LegCo are scheduled for 28 October 2026, with retrospective effect for contracts signed on or after 1 April 2026.

Here's what business owners and finance teams need to know.

1. Background: The Current Regime

Hong Kong already allows tax deductions for capital expenditure on eight types of eligible IP rights under sections 16E and 16EA of the IRO: patent rights and know-how (fully deductible in the year of purchase), plus six "specified IP rights" — copyright, registered designs, trade marks, layout-design rights, plant variety rights, and performer's economic rights — deducted over 5 years.

But three long-standing restrictions have limited their practical value, especially for multinational groups. The 2026 Bill addresses all three.

2. Three Key Changes

Purchase from associates is now deductible

Since 1992, section 16EC(2) has denied any deduction for IP bought from an associate (group company, related party). This was a blanket anti-avoidance rule, but it also blocked legitimate intra-group IP transfers.

The Bill removes this blanket denial, subject to safeguards:

• A main-purpose test — no deduction if one of the main purposes is to obtain a tax benefit
• Domestic intra-group transfers lose their transfer-pricing domestic exemption, so arm's-length pricing must be maintained
• For non-Hong Kong associate purchases above HKD 3 million, a third-party valuation report is required

This matters for multinationals considering centralising regional IP management in Hong Kong. Moving IP into a Hong Kong entity from a fellow group company will no longer be a tax-deduction dead end.

Offshore use by licensees — partial relaxation under FSIE

Under current rules (section 16EC(4)(b)), if you buy IP and a licensee uses it outside Hong Kong, the purchase cost is not deductible. This follows the territorial source principle.

Since the FSIE regime took effect in 2023, however, certain offshore IP licensing income received by MNE group members in Hong Kong is now chargeable to profits tax — creating an asymmetry where income is taxable but the purchase cost isn't deductible.

The Bill fixes this: if IP licensing income is chargeable under FSIE (deemed Hong Kong-sourced), the corresponding capital expenditure is deductible on a proportionate basis.

Note: this only covers FSIE-trapped income. Genuinely Hong Kong-sourced income from IP used offshore still falls under the existing denial rule.

Upfront licence fees become deductible

Currently, recurring royalty payments are deductible, but lump-sum upfront licence fees (capital in nature) are not. The Bill introduces a new section 16ED allowing deduction for capital expenditure on acquiring a licence to use eligible IP rights.

The deduction spreads over the shorter of the licence term or the statutory amortisation period (1 year for patents/know-how, 5 years for specified IP rights).

The Government also confirmed it will issue guidance on how franchise upfront fees fit into this regime.

One item dropped: the deeming provision from the May 2026 proposals that would have treated upfront licensing income received by a Hong Kong licensor as taxable trading receipts. It's not in the final Bill.

3. Anti-Abuse Safeguards

The Bill adds several guardrails:

• Main purpose test for associate purchases
• Valuation report for related-party transactions above HKD 3 million, or where the Commissioner requests it
• Claw-back provisions (section 16EE) — if the licence is terminated or assigned early, unamortised deductions are clawed back
• Transfer pricing rules now apply to domestic intra-group IP transfers

Common mistake: thinking you can inflate prices between group companies to claim extra deductions. The valuation requirement and transfer pricing rules prevent this. If the IRD asks for a valuation and you can't produce one, the deduction gets reduced or denied.

4. Timeline and Next Steps

The Bill receives First and Second Reading at LegCo on 28 October 2026. Assuming it passes, changes apply retrospectively to contracts from 1 April 2026 onward.

Here's the catch: "retrospective" means contracts already signed since April may qualify. If your company bought IP from an associate after 1 April 2026 and didn't claim deduction under the old rule, you may be able to revisit that position once enacted. But don't rush to amend returns yet — wait for the final law and any IRD guidance.

Actions to consider now:

• Review intra-group IP transfers from 1 April 2026 onward — flag for potential re-filing
• For upcoming IP purchases or licences, assume upfront fees and associate purchases may become deductible
• Get transfer pricing documentation in order — especially for domestic intra-group IP transfers
• If paying upfront licence fees above HKD 3 million to a related party, line up a qualified valuer early

5. Part of a Broader IP Strategy

This Bill is the latest step in building Hong Kong into a regional IP trading centre:

• July 2024 — "Patent Box" concessionary rate (5%) enacted
• 2025-26 Budget — IP deduction enhancements announced
• Jan 2026 — Public consultation
• May 2026 — Refined proposals published
• Oct 2026 — Bill gazetted

Combined with the IP Financing Sandbox (first 7 cases approved September 2026) and the Patent Valuation Support Scheme (HKD 80,000 grant), the deduction expansion adds another piece to the ecosystem.

For SMEs and mid-sized companies holding or acquiring IP, the cost of holding and licensing IP in Hong Kong is coming down. The question is whether your business is structured to capture those savings.

Need help assessing how these changes affect your company's IP portfolio? Reach out to our team at info@lcpa.com.cn or call 00852-55749538. We'll walk you through what's deductible, what documentation you need, and how to position your IP holdings.

Disclaimer: This article is for general information only and does not constitute tax advice. The Bill has not yet been enacted and provisions may change. Consult a qualified tax professional for specific guidance.