Hong Kong Gazettes Enhanced R&D Deduction

Hong Kong Gazettes Enhanced R&D Deduction

Hong Kong Government has gazetted law to allow enhanced tax deduction for expenses incurred by business enterprises on research and development (R&D) activities in Hong Kong.

The measure was announced by Carrie Lam, Chief Executive of Hong Kong, in her 2017 Policy Address.

The Inland Revenue (Amendment) (No. 7) Ordinance, 2018 – which was gazetted on November 2 – classifies R&D expenditures into “Type A expenditures” and “Type B expenditures.”

“Type A” expenditures qualify for 100 percent deduction.

“Type B expenditures” qualify for enhanced tax deduction as part of a two-tier deduction regime. The deduction is 300 percent for the first SGD2m of the aggregate amount of payments made to “designated local research institutions” for “qualifying R&D activities” and expenditures incurred by the enterprises for in-house qualifying R&D, and 200 percent for the remaining amount.

There is no cap on the amount of enhanced tax deduction. The arrangement is applicable to R&D expenditures incurred by enterprises on April 1, 2018, and thereafter.

The Ordinance empowers the Commissioner for Innovation and Technology to designate an entity or corporation that undertakes qualifying R&D activities in Hong Kong as a “designated local research institution” for tax deduction purposes.

R&D service providers may apply to the Innovation and Technology Commission (ITC) for designation. The procedure for designation would be published on the ITC’s website.

A government spokesman said that the Ordinance provides “enhanced tax deduction to encourage more enterprises to conduct R&D locally so as to promote technological innovation and economic development as well as to groom local R&D talent.”

“This also addresses the calls from the business community. We aim to encourage more R&D investment from private enterprises, thereby gradually reversing the ratio of public sector expenditure versus private sector expenditure on R&D from government-led to private-led, which is more sustainable.”