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March 7, 2024
2024-0542

Hong Kong announces 2024/25 annual Budget with new patent-box regime

  • A new patent-box regime will be introduced under which qualifying income will be taxed at 5%.
  • A two-tier standard rates regime is proposed for salaries tax and tax under personal assessment starting from 1 April 2024.
 

On 28 February 2024, the Financial Secretary (FS) of Hong Kong announced the 2024/25 Hong Kong Budget (Budget). This Alert summarizes the key features of the Budget.

Introduction of patent-box regime

Hong Kong has proposed a new patent-box tax incentive regime that complies with Base Erosion and Profit Shifting (BEPS) Action 5. A consultation was launched1 in this regard and a related bill will be introduced in the first half of 2024.

Under the proposed regime, qualifying income from the exploitation of patents and patent-like intellectual property rights in Hong Kong will enjoy preferential tax treatment and the concessionary tax rate will be at 5%. The FS also indicated that the funds will be set aside to support technology research institutes and research clusters.

Other key tax measures and developments

A two-tier standard rates regime is proposed for salaries tax and tax under personal assessment from 1 April 2024. This will only affect taxpayers being charged at the standard rates — their net income exceeding HK$5m (approximately US$600,000) will be subject to tax at 16%, while the first HK$5m in net income will continue to be subject to tax at 15%.

Currently there is a 25-year time limit on capital allowances for industrial and commercial buildings and structures. Starting from financial years ending on or after 1 April 2024, it is proposed that the purchaser of industrial and commercial buildings and structures that have been used beyond the 25-year period will still be eligible for capital allowances if conditions are met.

A tax deduction would be granted for expenses incurred in reinstating the condition of the leased premises to their original condition for financial years ending on or after 1 April 2024.

Certain duties would be removed — all Special Stamp Duty, Buyer's Stamp Duty and New Residential Stamp Duty on Hong Kong residential property transactions starting from 28 February 2024. Stamp duties would be waived on the transfer of real estate investment trust units and the jobbing business of option market-makers.

Meanwhile, a bill2 to enhance the aircraft leasing preferential tax regime was passed in the current form. The ordinance was gazetted3 on 1 March 2024 and will take retrospective effect for financial years ending on or after 1 April 2023.

Hong Kong is removed from the European Union watchlist

After Hong Kong revised the foreign-sourced income exemption regime regarding asset disposal gains,4 the European Union updated its watchlist on 20 February 2024 and removed Hong Kong from the list. This means that the exemption of certain passive offshore income in Hong Kong under the territorial-source tax regime would not be regarded as a harmful tax practice.

Endnotes

1 See EY Global Tax Alert, Hong Kong introduces new patent-box tax incentive; accepting comments until 30 September, dated 12 September 2023.

2 See EY Global Tax Alert, Hong Kong introduces bill to enhance aircraft leasing preferential tax regime, dated 7 December 2023.

3 See https://www.legco.gov.hk/en/legco-business/council/bills.html?bill_key=10040&session=2023.

4 See EY Global Tax Alert, Hong Kong passes bills on asset disposal gain regimes, dated 12 December 2023.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Tax Services Limited, Hong Kong

Ernst & Young LLP (United States), Hong Kong Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
 

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