The bill proposing an enhanced tax deduction for research and development (R&D) expenditure in Hong Kong was gazetted on 20 April 2018. Subject to certain conditions, there will be a 300% tax deduction for the first HK$2 million of qualifying R&D expenditure incurred by enterprises and a 200% tax deduction for the remaining amount, without limit. R&D expenditure that does not qualify for the enhanced deduction may continue to enjoy a normal 100% tax deduction subject to fulfilment of the specified conditions. Once the bill is enacted into law, the new R&D tax deduction regime will take effect retrospectively for expenditure incurred, or payment made on, or after, 1 April 2018.
While the bill represents a significant move in the right direction by the HKSAR Government to promote R&D activities in Hong Kong, the proposed enhanced R&D tax deduction regime is considerably complex. It specifies numerous conditions to be able to enjoy the enhanced tax deduction, introduces various deeming provisions treating certain R&D-related receipts that would otherwise not be subject to profits tax as taxable trading receipts, and includes anti-avoidance provisions to safeguard against abuse of the tax deductions (both normal and enhanced) for R&D expenditure.
Hong Kong companies that are engaging in, or planning to engage, in R&D activities in and/or outside Hong Kong should review their R&D activity arrangements in light of the proposed regime. They should also assess how to best structure their R&D activities so as to benefit from the enhanced R&D tax deduction in Hong Kong.