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Patent Box Regime – Illustrative Examples
- Eligible Person
- Eligible Intellectual Property
- Eligible IP Income
- Eligible R&D Expenditure / Non-Eligible Expenditure
- R&D Fraction
- Concessionary Portion of Assessable Profits
Company-HK, a company carrying on a manufacturing business in Hong Kong, engaged a third-party software developer, Company-S, in Hong Kong under an outsourcing arrangement requiring Company-S to develop a piece of software through carrying out certain research and development (“R&D”) activities. The software was tailor-made for Company-HK and embedded in its finished goods sold to its customers. The creation of the software gave rise to a copyright subsisting in software under the Copyright Ordinance (Cap. 528) (“Cap. 528”) and Company-HK was the owner of the copyright.
Since the copyrighted software was generated from R&D activities and was a copyright subsisting in software under Cap. 528, it would be an eligible intellectual property. Company-HK, as the owner of the copyrighted software, would be entitled to derive eligible IP income from the copyrighted software and thus would be qualified as an eligible person in respect of the copyrighted software.
The facts are the same as those in Example 1. Company-S earned outsourcing service fee income from Company-HK for its development work of the copyrighted software.
Company-S was engaged by Company-HK to develop the copyrighted software and earned the outsourcing service fee in return. It was not probable that the copyrighted software itself, at its development stage, would be qualified as an eligible intellectual property. Prior to the creation of the copyrighted software, Company-S could not derive any eligible IP income from the copyrighted software. Company-S would not be qualified as an eligible person in respect of the copyrighted software.
Example 3 – Whether an outsourced entity engaged by a copyright owner is an eligible person
The facts are the same as those in Example 1. Company-S rendered services to Company-HK with the use of its own intellectual property (“the Subject IP”) that was an eligible intellectual property for deriving the outsourcing service fee income from Company-HK.
Company-S would be qualified as an eligible person to claim tax concession for eligible IP income derived from the Subject IP.
Company-HK was a licensed pharmaceutical manufacturer in Hong Kong. It worked in concert with an education institution in Hong Kong (“the Institution”) to invent a patented medicine for a respiratory disease. The Institution retained the ownership of the patent which was an eligible intellectual property and granted to Company-HK an exclusive right to commercially use or exploit the patent.
Since Company-HK was a licensee having the right to use the patent for deriving income, it would be regarded as an eligible person to claim the tax concession for the eligible IP income derived from the patent.
Example 5 – Online game and platform
Company-HK developed a new platform for hosting online games and a new game. In developing the new platform, Company-HK applied research findings for producing a substantially improved online gaming platform that represented an innovative approach to gaming. According to the expertise advice sought by Company-HK, the new platform was developed based on new technology. Regarding the new game, Company-HK carried on systematic market research covering demographics and psychographics of target audience, popularity of different game genres, performance of competitors and features of competitors’ gaming platforms in the market, and applied the research findings to the game design, source code writing and graphic design.
Applying research findings for producing the substantially improved online gaming platform would be regarded as an R&D activity (i.e. under limb (d) of “R&D activity” as defined in section 2 of Schedule 45 to the Inland Revenue Ordinance (“Schedule 45”)). The new platform would qualify as an eligible intellectual property under the Patent Box regime provided that the copyright subsisting in the new platform was protected under Cap. 528 or the copyright law of a place outside Hong Kong.
Conducting systematic market research and applying the research findings for developing the new online game would be regarded as R&D activities (i.e. under limbs (b) and (d) of “R&D activity” as defined in section 2 of Schedule 45). The new online game would qualify as an eligible intellectual property under the Patent Box regime provided that the copyright subsisting in the new game was protected under Cap. 528 or the copyright law of a place outside Hong Kong.
Company-HK developed a new mobile application (version 1.0) as an online shopping platform with a new security technique. Before creating the mobile application, Company-HK had engaged a third-party consulting firm in Jurisdiction-F to carry on a systematic market research covering the trend of the e-commerce sector as well as the strengths and weaknesses of the existing online shopping platforms. In addition, Company-HK conducted a feasibility study for the mobile application.
Conducting systematic market research and applying the research findings for developing the new mobile application would be regarded as R&D activities (i.e. under limbs (b) and (d) of “R&D activity” as defined in section 2 of Schedule 45). The new mobile application would qualify as an eligible intellectual property under the Patent Box regime provided that the copyright subsisting in the new mobile application was protected under Cap. 528 or the copyright law of a place outside Hong Kong.
Example 7 – De-bugging and minor improvements to mobile application
The facts are the same as those in Example 6. Subsequent to the release of the new mobile application (version 1.0) to the market, Company-HK released an updated version of the mobile application (version 1.1) to fix some minor bugs as well as certain issues reported by the users.
De-bugging and making minor improvements to the existing mobile application would not fall within the meaning of “R&D activity” as defined in section 2 of Schedule 45. As such, the mobile application (version 1.1) would not qualify as an eligible intellectual property.
The facts are the same as those in Example 6. After releasing the mobile application (version 1.0) to the users, Company-HK carried out further systematic activity for the purposes of feasibility study on the possible enhancements as well as the ways to remedy the defects identified on the mobile application. Based on its research findings, Company-HK upgraded the mobile application to a version with new features, security improvements, performance enhancements and bug-fixes (version 2.0). The mobile application (version 2.0) had significantly enhanced the performance of the mobile application.
Carrying out the systematic activity and applying the research findings to develop the updated mobile application (version 2.0) would be regarded as R&D activities (i.e. under limbs (b) and (d) of “R&D activity” as defined in section 2 of Schedule 45). The mobile application (version 2.0) would qualify as an eligible intellectual property under the Patent Box regime provided that the copyright subsisting in the mobile application (version 2.0) was protected under Cap. 528 or the copyright law of a place outside Hong Kong.
Company-HK developed a new layer 2 protocol, which was an off-chain system built on top of a blockchain to help extend its capacities for recording transactions in a secured manner with great efficiency and scale. In developing the layer 2 protocol, Company-HK conducted an investigative research on the existing protocols in the market and carried out a feasibility study for applying blockchain technology. The layer 2 protocol, which was new to the market, was developed based on an existing open source protocol that was found by overseas non-associated parties. Company-HK outsourced the development work of the layer 2 protocol to a number of independent contractors outside Hong Kong. Its key R&D personnel based in Hong Kong oversaw the development work.
Carrying out of investigative research and feasibility study in relation to the development of the layer 2 protocol would be regarded as R&D activities (i.e. under limbs (b) and (d) of “R&D activity” as defined in section 2 of Schedule 45). The layer 2 protocol would qualify as an eligible intellectual property under the Patent Box regime provided that the copyright subsisting in the layer 2 protocol was protected under Cap. 528 or the copyright law of a place outside Hong Kong.
Example 10 – Further development on patent by licensee
Company-HK was licensed by Company-F1, a non-associated company resident in Jurisdiction F1, to use a patented chemical compound for lung cancer detection. The patent of the chemical compound was granted by the patent office of Jurisdiction F1 on 1 July 2024. Under the terms of the licence agreement, Company-HK had rights to further develop the patented chemical compound and commercialise any products developed based on it. Company-HK’s R&D team carried out R&D activities to develop a test kit, which was proved as a new or substantially improved product, based on the patented chemical compound in Hong Kong. Company-HK outsourced clinical trials to Company-F2, a third party resident in Jurisdiction F2, before the test kit was approved by the Department of Health in Hong Kong. On 1 March 2025, Company-HK filed its patent application in respect of the test kit to the Intellectual Property Department (“IPD”).
The work done by Company-HK’s R&D team in Hong Kong and the clinical trials performed by Company-F2 outside Hong Kong would qualify as R&D activities (i.e. under limb (d) of “R&D activity” as defined in section 2 of Schedule 45). The test kit would be regarded as an eligible patent as Company-HK made a patent application for it to the IPD.
The facts are the same as those in Example 1. Company-HK derived profits from selling of finished goods in which the copyrighted software was embedded.
Company-HK should use a transfer pricing methodology to ascertain, on a just and reasonable basis, the portion of the income from the sale of its finished goods that was attributable to the value of the copyrighted software (i.e. the embedded IP income) for claiming tax concessions under the Patent Box regime.
Example 12 – Embedded IP income in service income
The facts are the same as those in Example 3. Company-S derived outsourcing service fee income from Company-HK as a result of the exploitation of the Subject IP.
Company-S should use a transfer pricing methodology to ascertain, on a just and reasonable basis, the portion of the service fee income that was attributable to the value of the Subject IP (i.e. embedded IP income) for claiming tax concessions under the Patent Box regime.
Example 13 – Use of several patents in one single product
Company-HK, with the support of its overseas subsidiary (Subsidiary-F) which was resident in Jurisdiction F, carried out certain research activities for its robotic business. Company-HK’s R&D team led by Mr A carried out research activities in Hong Kong. Mr A travelled regularly to Jurisdiction F to oversee the work performed by Subsidiary-F’s R&D team for which Company-HK paid a service fee to Subsidiary-F. Company-HK’s research activities constituted an original and planned investigation with the prospect of gaining new scientific or technical knowledge and understanding or, alternatively, the application of knowledge to a design for producing new or substantially improved products before they were commercially produced. Through the research activities, Company-HK successfully developed four patented inventions (“the 4 Patents”), namely Patent I, Patent II, Patent III and Patent IV, in the field of robotic applications. Company-HK used Patent I, Patent II and Patent III in developing Robot A as well as Patent I and Patent IV in developing Robot B. Company-HK sold both of the intelligent caretaking robots to hospitals.
As Patent I, Patent II, Patent III and Patent IV were generated from R&D activities, all these eligible patents would qualify as eligible intellectual properties. The portion of the sales proceeds from Robot A and Robot B, on a just and reasonable basis, attributable to the value of the eligible intellectual properties would be regarded as embedded IP income.
Company-HK carried on an on-line shopping business in Hong Kong. It had no physical stores and simply relied on an on-line platform to carry out all marketing and sales activities. All along, Company-HK maintained a R&D team in Hong Kong to conduct systematic, investigative or experimental activities in relation to market, business or management research, where applicable. The R&D team invented a piece of copyrighted software which enabled a series of system development including an upgrade of layout, enhancement of security technique, automatic bug-fixing works, etc. The application of the copyrighted software had, in turn, boosted Company-HK’s sales performance.
Company-HK derived income from sale of goods through the on-line platform. As the copyrighted software had not been embedded in the goods sold by Company-HK, no part of its income would be regarded as eligible IP income.
Example 15 – Whether expenditure qualifies as eligible R&D expenditure or non-eligible expenditure
The facts are the same as those in Example 9. Company-HK incurred payroll cost for its key R&D personnel in Hong Kong and service fees to the independent contractors outside Hong Kong.
For the purpose of ascertaining the R&D fraction in respect of the layer 2 protocol, Company-HK’s expenditure (including the payroll cost of its R&D personnel) attributable to the investigative research, feasibility study and development work in relation to the layer 2 protocol would be regarded as eligible R&D expenditure pursuant to section 13(1)(a) and (b)(i) of Schedule 17FD to the Inland Revenue Ordinance (“Schedule 17FD”). Its payments to the non-associated parties for developing the layer 2 protocol on its behalf would also be regarded as eligible R&D expenditure pursuant to section 13(1)(a) and (b)(ii) of Schedule 17FD.
The facts are the same as those in Example 10. Company-HK paid a licence fee to Company-F1 to obtain the right to use the patented chemical compound for developing the test kit. Also, it incurred R&D expenditures in Hong Kong and a service fee to Company-F2 for conducting clinical trials.
For the purpose of ascertaining the R&D fraction in respect of the test kit, the R&D expenditures and the service fee to Company-F2 incurred by Company-HK for the development and commercialisation of the test kit would be regarded as eligible R&D expenditure pursuant to section 13(1)(a), and section 13(1)(b)(i) and (ii) respectively, of Schedule 17FD. However, the licence fee paid by Company-HK to Company-F1 would be regarded as non-eligible expenditure pursuant to section 14(1)(a) of Schedule 17FD.
The facts are the same as those in Example 13. Company-HK incurred payroll cost for its R&D team in which Mr A was included. Besides, it paid a service fee to Subsidiary-F for the development of the 4 Patents.
For the purpose of ascertaining the R&D fraction in respect of each of the 4 Patents, Company-HK’s payroll cost for the R&D team attributable to the development of the relevant patent would be regarded as eligible R&D expenditure pursuant to section 13(1)(a) and (b)(i) of Schedule 17FD. The service fee paid to Subsidiary-F would be regarded as non-eligible expenditure pursuant to section 14(1)(b)(ii)(A) of Schedule 17FD as Subsidiary-F was an associated person of Company-HK and a non-Hong Kong resident person. Furthermore, since the tax concessions under the Patent Box regime are granted in respect of each eligible intellectual property, Company-HK should ascertain eligible IP income derived from each of the 4 Patents and apply respective R&D fractions to compute the concessionary portion of assessable profits from each patent.
Company-HK carried out R&D activities leading to a number of patents that it exploited. Starting from 1 July 2024, Company-HK had engaged Company-F, an independent overseas entity resident in Jurisdiction F, to carry out part of its R&D activities on its behalf at a service fee paid on a monthly basis. On 1 September 2024, Company-HK acquired Company-F as its wholly owned subsidiary.
The service fees paid to Company-F for July and August 2024, during which Company-F was not associated with Company-HK, would be regarded as eligible R&D expenditure pursuant to section 13(1)(a) and (b)(ii) of Schedule 17FD. However, Company-F became associated with Company-HK due to the acquisition on 1 September 2024. Since then, the service fees paid by Company-HK to Company-F would become non-eligible expenditure pursuant to section 14(1)(b)(ii)(A) of Schedule 17FD.
Example 19 – Whether expenditure qualifies as eligible R&D expenditure or non-eligible expenditure
Company-HK maintained its own laboratory and the core of the R&D work was performed by Company-HK in its own laboratory in Hong Kong staffed with R&D personnel. Company-HK incurred in Hong Kong staff costs and expenditures on consumable items totaling $5 million for the R&D project in developing its own eligible intellectual property.
The staff costs and expenditures on consumable items totaling $5 million incurred by Company-HK for the R&D activities in relation to the development of its eligible intellectual property would be regarded as eligible R&D expenditure pursuant to section 13(1)(a) and (b)(i) of Schedule 17FD.
Example 20 – Whether expenditure qualifies as eligible R&D expenditure or non-eligible expenditure
In developing an eligible intellectual property, Company-HK hired its own R&D personnel to carry out the core R&D activities. Besides, it outsourced certain R&D activities to a non-associated company, Company-F, for performing the R&D activities on its behalf outside Hong Kong. Company-HK incurred salaries for its own R&D personnel and outsourcing fees to Company-F.
The staff salaries attributable to the carrying out of the R&D activities for developing the eligible intellectual property and the outsourcing fees paid to Company-F would be regarded as eligible R&D expenditure pursuant to section 13(1)(a), and (b)(i) and (ii) of Schedule 17FD.
Example 21 – Whether expenditure qualifies as eligible R&D expenditure or non-eligible expenditure
Company-HK and Associate-HK were both Hong Kong resident persons. Company-HK outsourced its R&D activities to Associate-HK which performed the R&D activities in Hong Kong. Company-HK incurred outsourcing fees to Associate-HK.
As Associate-HK was a Hong Kong resident person and it carried out the R&D activities on behalf of Company-HK in Hong Kong, the outsourcing fees paid by Company-HK to Associate-HK would be regarded as eligible R&D expenditure pursuant to section 13(1)(a) and (b)(iii) of Schedule 17FD.
The facts are the same as those in Example 21, except that Associate-HK performed the R&D activities outside Hong Kong.
As Associate-HK carried out the R&D activities on behalf of Company-HK outside Hong Kong, the outsourcing fees paid by Company-HK to Associate-HK would be regarded as non-eligible expenditure pursuant to section 14(1)(b)(ii)(B) of Schedule 17FD.
Example 23 – Whether expenditure qualifies as eligible R&D expenditure or non-eligible expenditure
Company-HK outsourced its R&D activities to Associate-F which was resident in Jurisdiction F. Company-HK incurred outsourcing fees to Associate-F for its carrying out of the R&D activities.
As Associate-F was associated with Company-HK and was a non-Hong Kong resident person, the outsourcing fees paid by Company-HK to it would be regarded as non-eligible expenditure pursuant to section 14(1)(b)(ii)(A), irrespective of whether Associate-F performed the R&D activities in or outside Hong Kong.
Company-HK obtained a loan of $100 million at an annual interest rate of 5% from a bank exclusively for its R&D activities in respect of the development of an eligible intellectual property.
The interest expense incurred by Company-HK would neither be eligible R&D expenditure nor non-eligible expenditure pursuant to sections 13(2)(a) and 14(2)(a) respectively, of Schedule 17FD.
Company-HK worked in concert with a university in Hong Kong (“the University”) to invent a patented medicine. The University retained the ownership of the patent and Company-HK paid annual licence fees to the University for an exclusive right to commercially use or exploit the patent.
In ascertaining the R&D fraction for determining the concessionary portion of eligible IP income accrued to Company-HK, the licence fees paid by Company-HK to the University for obtaining the exclusive right would be regarded as non-eligible expenditures pursuant to section 14(1)(a) of Schedule 17FD.
Company-HK bought a piece of land and incurred construction cost for erecting a building on the land as its own R&D laboratory. Company-HK incurred land cost and building construction cost for the R&D laboratory.
The land cost and building construction cost would neither be regarded as eligible R&D expenditure nor non-eligible expenditure pursuant to sections 13(2)(b) and 14(2)(b) respectively, of Schedule 17FD.
Company-HK and Associate-F, a company resident in Jurisdiction F, were members of a group engaging in drug science. The group had a research laboratory operated by Associate-F in Jurisdiction F, which undertook an R&D project on a new drug for the whole group. The patent generated from the R&D project was owned by Associate-F. In January 2025, Associate-F transferred its patent ownership to Company-HK at an arm’s length price of HK$1 million (“Acquisition Cost”).
In ascertaining the R&D fraction for determining the concessionary portion of eligible IP income accrued to Company-HK, the Acquisition Cost would be regarded as non-eligible expenditure pursuant to section 14(1)(a) of Schedule 17FD.
Company-HK hired a team of R&D personnel who simultaneously performed R&D activities for two eligible intellectual properties, namely Patent A and Patent B.
The salaries paid by Company-HK to its R&D personnel would be regarded as eligible R&D expenditure which was connected to Patent A and Patent B. For the purpose of ascertaining the R&D fraction in respect of each patent, Company-HK should apportion the salaries expenses between Patent A and Patent B on a just and reasonable basis pursuant to section 13(5) of Schedule 17FD.
Example 29 – Computation of R&D fraction
Company-HK derived eligible IP income from an eligible intellectual property and incurred certain R&D expenditure in respect of the eligible intellectual property during Years 1, 2 and 3.
The concessionary portion of the assessable profits from the eligible IP income would be computed based on the R&D fraction as shown in the table below:
| Year 1 $ |
Year 2 $ |
Year 3 $ |
||||
| Eligible R&D expenditures | ||||||
| In-house R&D expenditure | 400 | 100 | 700 | |||
| R&D activity by non-associated person | 100 | Nil | Nil | |||
| R&D activity by associated person who is a HK resident person and carried out R&D activities in HK | Nil | Nil | 100 | |||
| Total: (A) | 500 | 100 | 800 | |||
| Non-eligible expenditure | ||||||
| Acquisition cost | Nil | Nil | 100 | |||
| R&D activity by associated person who is a HK resident person but carried out R&D activities outside HK | Nil | 300 | Nil | |||
| Total: (B) | Nil | 300 | 100 | |||
| Overall expenditures | ||||||
| Total: (A) + (B) | 500 | 400 | 900 | |||
| Calculation of R&D fraction | ||||||
| Cumulative R&D fraction | 500 x 1.3 | = 1.3 | (500+100) x 1.3 | = 0.87 | (500+100+800) x 1.3 | = 1.011 |
| 500 | (500+400) | (500+400+900) | ||||
| R&D fraction (capped at 1) | 1 | 0.87 | 1 | |||
Company-HK incurred an acquisition cost of $500,000 to obtain from a third party a right to use a piece of copyrighted software and related rights. Company-HK did not perform any R&D activities to develop the copyrighted software further. Instead, it deployed the copyrighted software outright in providing services to its customer for earning business profits, out of which $1 million was attributable to the copyrighted software.
For the purpose of ascertaining the R&D fraction in respect of the copyrighted software for determining the concessionary portion of Company-HK’s profits, the acquisition cost would be regarded as a non-eligible expenditure pursuant to section 14(1)(a) of Schedule 17FD. Company-HK did not have any expenditure qualified as eligible R&D expenditure as no R&D activities had been carried out by it. As a result of a zero numerator, the R&D fraction would be zero. Thus, no part of Company-HK’s profits attributable to the copyrighted software would be regarded as concessionary portion of assessable profits for enjoying the concessionary tax rate of 5% under the Patent Box regime.
The facts are the same as those in Example 30, except that Company-HK incurred the following expenditures on an R&D activity in respect of the copyrighted software after acquiring it at $500,000:
| Type of expenditure | $ | Eligible R&D expenditure | Non-eligible expenditure | |||
| In-house R&D expenditure | 200,000 | ✓ | ✗ | |||
| Building alteration | 800,000 | ✗ | ✗ | |||
| R&D activity carried out in Hong Kong by an associated person that was a Hong Kong resident person on behalf of Company-HK | 100,000 | ✓ | ✗ | |||
| R&D activity carried out outside Hong Kong by an associated person that was a Hong Kong resident person on behalf of Company-HK | 100,000 | ✗ | ✓ | |||
| R&D activity carried out by a non-associated person on behalf of Company-HK | 200,000 | ✓ | ✗ | |||
| R&D activity carried out by an associated person that was a non-Hong Kong resident person on behalf of Company-HK | 200,000 | ✗ | ✓ | |||
| Total eligible R&D expenditure (A) | 200,000 + 100,000 + 200,000 = 500,000 | |||||
| Total non-eligible expenditure (B) | 100,000 + 200,000 + 500,000 = 800,000 | |||||
| Overall expenditure (A) + (B) | 500,000 + 800,000 = 1,300,000 | |||||
| R&D fraction (capped at 1) (A) × 1.3 (A) + (B) |
500,000 x 1.3 | = 0.5 | ||||
| 1,300,000 | ||||||
In this case, the concessionary portion of assessable profits from the copyrighted software would be $500,000 (i.e. $1 million × 0.5), which would be chargeable at the concessionary tax rate of 5%.