HONG KONG SAR – Media OutReach – 13 December 2021 – Taxation can be an effective tool for influencing corporate behaviour. Cheng & Cheng Taxation Services Limited (“Cheng & Cheng’s Taxation”) regards it is the reason why many jurisdictions are devoting huge amounts of resources in an effort to attract research and development (R&D) centres. In this, Hong Kong is no exception.
A ‘super tax deduction’ on certain R&D activities was introduced in Hong Kong with effect from the year of assessment 2018/19. This was a breakthrough in Hong Kong’s taxation system as it was the first time that the Inland Revenue Department (IRD) had allowed deductions of 300%/200% on certain operating expenditure. The first HK$2 million spent on qualifying R&D expenses is eligible for a 300% tax deduction. For amounts over HK$2 million, a 200% tax deduction will be granted.
There are two important tax considerations relating to R&D expenses in Hong Kong:
- Requirements for Hong Kong’s super tax deduction on R&D activities
- Tax risk on R&D expenses paid by a Hong Kong corporation to overseas entities
A three-minute video relating to each consideration to facilitate your understanding of the issues. Please refer to this link (Link) to access to the videos.
Cantonese Version : Link
Mandarin Version : Link
Requirements for Hong Kong’s super tax deduction on R&D activities
Carrying out the R&D activities in Hong Kong is compulsory for qualification for the super tax deduction.
Hong Kong Science Park and Cyberport are popular incubators for start-ups in Hong Kong, particularly for those with significant R&D functions, as they offer appealing incentives and funding for start-ups. The super tax deduction is a further incentive introduced by the Hong Kong government for corporations carrying out R&D activities in Hong Kong.
Below is a summary of some of the basic requirements for the super tax deduction:
Requirement 1:
The R&D activities must be carried out either by the taxpayers themselves, or must be outsourced to designated local research institutions. Outsourcing of R&D activities to group companies or external parties that are not designated local research institutions are generally not eligible for the super tax deduction, except under proper cost-recharge arrangements. A list of designated local research institutions can be found on the Hong Kong government website. (Link)
Requirement 2:
For R&D activities carried out by the taxpayers themselves, only consumables and staff costs directly related to the R&D activities qualify for the super tax deduction. These expenses have to be exclusively and directly related to the R&D activities in order to qualify for the super tax deduction. (Link for illustration of Qualifying R&D Expenses)
Tax risk on R&D expenses paid by a Hong Kong corporation to overseas entities
At first, R&D payments made to overseas group companies were not tax deductible in Hong Kong under the IRO’s original Section 16B. The recent amendments under Departmental Interpretation and Practice Notes (DIPN) 55 have now slightly relaxed the situation, but it is still difficult.
R&D expenses are subject to specific tax deduction rules in Hong Kong. The underlying reason is that R&D is treated as a capital expenditure by the IRD, since R&D activities tend to bring fundamental change and significant advancements to the products or services of a company. Capital expenditure is generally not tax deductible in Hong Kong.
Section 16B of the IRO is the legal provision that governs tax deductions for R&D expenses. It is too complex to go through all details of Section 16B here, but Cheng & Cheng’s Taxation will highlight the current situation of cross-border R&D cost recharge arrangements, which are common for multinational corporations.
Regardless of the super tax deduction, R&D payments made in the past to overseas group companies were not tax deductible in most circumstances under Section 16B. Now, under DIPN 55, R&D fees paid to overseas group companies could qualify for the 100% normal tax deduction if both the following conditions are met:
- Not more than 20% of the total R&D costs of the Hong Kong company are subcontracted to overseas group companies; and
- The R&D costs paid to overseas companies should not be more than HK$2 million.
Despite the relaxation in DIPN 55, it is still difficult for multinational corporations with significant R&D functions outside Hong Kong to pursue tax deductions for R&D costs. Multinational corporations should plan their R&D cost contribution and subcontracting arrangements carefully.
Tax advisory consulting
Multinational corporations should consult their tax advisors to ensure thorough cross-border tax planning is in place to maximise the tax benefits.
There are pros and cons to incurring R&D costs in Hong Kong from a tax perspective. Multinational corporations should consult their tax advisors to ensure their current R&D arrangements are eligible for the maximum tax deduction, with a view to improving their group’s overall tax efficiency.
For more details of Hong Kong and Mainland China tax news, please visit our website at https://henrykwongtax.com.
About Cheng & Cheng Limited
Cheng & Cheng Limited, one of the member firms of Cheng & Cheng Group, is an accounting firm established in Hong Kong with over 250 staff locate in Hong Kong and Mainland China. We are the principal auditor for 10 listed corporations in Hong Kong and the tax advisor for over 80. We specialise in providing Hong Kong, Mainland China and international tax advisory services, as well as transfer pricing services to international clients. If you would like to know more about R&D super tax deduction in Hong Kong, or seek tax advice, please do not hesitate to contact us by email (henry.kwong@chengtax.com.hk) or phone (3962 0114).
Legal Disclaimer:
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
#Cheng&ChengLimited
The issuer is solely responsible for the content of this announcement.
Services
Stakeholder mapping, analysis, engagement and communication needs to be detailed to avoid business losses or even worse, a crisis. How can you do this effectively to prevent failure? ...
Data-driven business decisions have never been as crucial, especially in this era. MGBF leverages off, technology, experience and market presence to aid businesses in making accurate decisions. ...
MGBF provides comprehensive strategic advice and results-focused solutions to solve clients' problems in business-government relations so they can focus on their core business. ...
A critical business challenge is meeting the right decision-makers and potential buyers through the best channel and platform. How will you improve your business competency? ...
Upcoming Events
MGBF founding chairman Nordin Abdullah and UMW Toyota president Datuk Ravindran K. will delve into the convergence of automotive innovation and environmental sustainability in Penang, Sarawak, Johor and Pahang.
Hosted by menumiz™ – an end-to-end restaurant management system – this roundtable will feature a case study presentation and a panel session to discuss the latest digital trends, challenges, and opportunities within the food and beverage sector.
In this episode of 'A Working Lunch with Nordin', MGBF's founding chairman, Nordin Abdullah, will host this discussion focusing on the biggest threats and opportunities for businesses as we look to manage change in the South China Sea.
This MGBF Roundtable will focus on regional food security issues and trends in the regional supply chain, and trade regulations and policies, including a new geopolitical tool i.e., weaponisation of supply chains.
MGBF In The News
News provided by Emjay Communications Malaysia and China commemorated a historic milestone of 50 years of diplomatic relations with a grand celebration at Sunway Velocity Mall on the 10th of August 2024. The event, themed “Hi China: Discovering China Opportunities and Celebrating 50 Years of China-Malaysia Relationship,” aimed to deepen […]
Planet QEOS, KIS BlOCNG San Bhd, and the Sarawak Land Consolidation and Rehabilitation Authority (SALCRA) have officially signed a tripartite memorandum of understanding (MoU) to establish a collaborative framework aimed at producing bio-hydrogen via the Steam Biomethane Reforming (SBMR) Process. The MoU was signed by Planet QEOS executive chairman Dino […]
Planet QEOS and China Machinery Engineering Corporation (CMEC) are interested in investing RM10 billion to co-develop advanced Megawatt peak (MWp) agrovoltaic in Baram, to further boost Sarawak’s green energy initiative and food security. Sarawak Premier Datuk Patinggi Tan Sri Abang Johari Tun Openg was briefed on Friday by both the […]
Last week SPM results came out, 373,974 aspirants who have been waiting patiently over the last few months would now know their fate. Some 10,109 have received all A’s, the golden standard of academic success and the ticket to those looking to study the “more advanced” subjects in university. Proudly, […]
The classic knee-jerk reaction is to say, fire the coach, change the leadership of associations, and reduce the funding till they start performing better. This kind of negative reinforcement may work for kindergarten children, but we are dealing with high-performance adults – individuals much further along in their psychological and […]
Since its earliest tea plantations in 1929, Cameron Highlands has grown to become a key player in the agricultural landscape of Malaysia, producing 40 per cent of all vegetables grown. Despite Malaysia shifting its economic focus away from agriculture, the industry remains imperative for food security and the livelihoods of […]
Although at first glance the travel industry and the agricultural sector appear to have nothing in common, they actually share more than meets the eye. The economic benefits of tourism to the agricultural sector can be multiplied several times over. “Tourism brings the end consumers closer to the source, which […]
The Malaysia Global Business Forum (MGBF) recently held a high-level roundtable themed ‘Designing the Future of the Digital Economy’, attended by industry leaders and business associations. The guest of honour was Yang Berhormat Syerleena Abdul Rashid, the Member of Parliament (MP) for Bukit Bendera in Penang. The MP’s Special Session […]
The Malaysia Global Business Forum (MGBF) will be hosting a roundtable on ‘Designing the Future of the Digital Economy’ on 23 February 2023. It is the culmination of the first three MGBF Exclusive Roundtable Series titled ‘The Evolving Threat Matrix in the Digital Economy’ held throughout 2022. According to the […]
The Founding Chairman of the Malaysia Global Business Forum (MGBF), Nordin Abdullah, today spoke on Bernama TV’s leading English talk show, The Brief, hosted by Jessy Chahal, on the topic of a stable political reality and what that means for the Malaysian economy. Nordin said, “The first thing that it […]
More than 1,100 years ago, Muhammad ibn Musa al-Khwarizmi was developing the mathematical formulas that we know today as algorithms which now have become so intertwined with the business fortunes of global media giants and the very fabric of geopolitics. A series of recent high level international reports have revealed […]
KSK Land has been recognised by the Malaysia Global Business Forum (MGBF) for its role in attracting high net-worth individuals to Malaysia post-pandemic. The first challenge in investor attraction is “selling” the country. In the context of Asia, Malaysia is competing with some very established investment destinations. The second […]
Malaysia, in particular Kuala Lumpur, continues to position itself as a regional centre to do business, educate a family and enjoy a global lifestyle. One company, KSK Land, has taken the lead in positioning itself and the city of Kuala Lumpur as a property investment destination for the global citizen […]
The upcoming budget represents an opportunity to build resilience in the critical sectors that will form the backbone of the country’s future-facing economic ambitions. This however needs to be achieved in the context of managing the community sectors most impacted by COVID-19 over the past two years. The Keluarga Malaysia (Malaysian Family) […]
Malaysia Global Business Forum (MGBF) has moved to support the creative economy as the overall economy moves into a recovery phase following the COVID19 pandemic. As a step in the direction of normalcy, the MGBF has agreed to host the art exhibition “I Know You’re Somewhere So Far” by one […]
Congratulations to Datuk Seri Ismail Sabri Yaakob for taking up the mantle of the ninth prime minister of Malaysia. There is nothing normal about the situation; it could not have been scripted but it has kept the spectrum of media, mainstream and social, gripped. The first order of business for […]
In a stirring speech to the nation, President Joseph R. Biden, Jr. stamped his brand of leadership on the presidency, in his first act as the 46th president of the United State of America, it signaled several shifts. Perhaps the weather was foreboding with snow falling before the ceremony that […]
KUALA LUMPUR, 6 July 2022 – As the global economy continues to deal with unprecedented levels of disruption caused by the pandemic and the conflict between Russia and Ukraine, the convergence of energy security and food security issues has become a front-of-mind issue faced by policy makers and consumers alike. […]
KUALA LUMPUR, 23 June 2022 — Malaysia Global Business Forum (MGBF) ties up with scoutAsia to ensure that businesses are equipped with deeper regional insights. The past two years has seen a massive shift in the way businesses are conducted with digitisation, digitalisation and automation continuously being adopted to improve […]
KUALA LUMPUR, 25 May 2022 – The Malaysia Global Business Forum (MGBF)’s exclusive roundtable on ‘Security Concerns in Critical Value Chains’ was held in a hybrid setting yesterday at the Eastin Hotel Kuala Lumpur. The guest of honour was Yang Berbahagia Tan Sri Dato’ Seri Rafidah Aziz, former minister of […]
