Hong Kong gazettes IP tax deduction bill: upfront licence fees proposed for relief, but franchise businesses must check eligibility

On 16 October 2026, the Hong Kong Government gazetted the Inland Revenue (Amendment) (Tax Deductions for Intellectual Property Expenditure) Bill 2026, proposing broader tax deductions for capital expenditure on acquiring qualifying intellectual property (IP) and rights to use it. For businesses in Hong Kong’s franchise sector, the key proposal is to bring upfront licence fees within the scope of deductions. This does not mean that all franchise fees would be deductible, however, and the bill must still complete the legislative process.

Upfront licence fees are a key addition to proposed deductions

According to a press release published by the Inland Revenue Department, the bill proposes allowing businesses to claim tax deductions for upfront licence fees paid under licensing arrangements to use qualifying IP. The Government says the measures aim to further promote IP development and commercialisation while reducing related transaction costs.

The key question is whether the expenditure constitutes an upfront licence fee for the use of qualifying IP, rather than whether the contract is labelled a ‘franchise’ agreement. The arrangements announced by the Government do not classify all franchise-related payments as qualifying expenditure. Businesses should therefore not treat their entire franchise investment as tax-deductible simply on the basis of how a payment is described.

Prospective franchisees preparing to sign licensing agreements, and brand owners setting their fee structures, should first clarify which rights the payments cover, the scope of permitted use and the nature of the fees, then seek an assessment from a tax adviser. This will help avoid mistaking a proposal targeting capital expenditure on IP for a general tax concession on franchise fees.

Proposals also cover related-party acquisitions and overseas use

Alongside upfront licence fees, the bill covers two further categories of capital expenditure. The first is the acquisition of qualifying IP from related parties, including purchases of rights from associated group companies. The Government hopes this will encourage multinational enterprises to centralise IP management in Hong Kong and facilitate local transfers and commercial activities within corporate groups.

The second is the acquisition of qualifying IP for use by licensees outside Hong Kong, subject to conditions. The related licensing income must be deemed to arise in or derive from Hong Kong under the foreign-sourced income exemption regime and be subject to Hong Kong profits tax. Only then would the capital expenditure on acquiring that IP qualify for a proportionate deduction.

Brand owners involved in cross-border licensing therefore need to check not only where the IP is used, but also how the related income is treated for tax purposes. Each of the three proposed categories has its own scope. Acquiring rights from related parties, acquiring rights for overseas use and paying upfront fees for usage rights should not be treated as interchangeable.

Contract dates specified, but legislative scrutiny is still pending

The bill proposes that the amendments apply to contracts entered into on or after 1 April 2026 to acquire qualifying IP or rights to use it. This refers to the date the contract is entered into; it does not mean that any payment made after that date would qualify.

The Government has announced that the bill will be introduced into the Legislative Council for its first and second readings on 28 October. Gazettal is not the same as enactment. When assessing franchise investments or licensing transactions at this stage, businesses should clearly identify the tax deductions as proposals and should not treat anticipated tax savings as confirmed benefits.

To prepare, franchisees and brand owners can compile records of contract dates, the scope of licensed rights, payment arrangements and related expenditure, then assess eligibility against the final legislation. A contract falling within the proposed eligibility period does not remove the need to examine the other qualifying conditions.

Anti-abuse safeguards for related-party transactions

The Government has also proposed a series of safeguards to protect Hong Kong’s tax base and prevent excessive deductions. These include a main purpose test for IP acquisitions from related parties, as well as a method for calculating the deductible amount when IP is acquired from a related party carrying on business in Hong Kong.

In addition, an independent third-party valuation report would be required to support a deduction claim where the relevant capital expenditure exceeds a specified threshold. This requirement would apply to acquisitions of qualifying IP from related parties not carrying on business in Hong Kong, and to licences obtained from related parties to use qualifying IP.

These arrangements show that broader deductions do not mean transactions will escape scrutiny. Franchise businesses involved in intra-group licensing or transfers of rights should consult their advisers early to check related-party relationships, transaction values and valuation documentation requirements, rather than estimating the tax benefit solely from the fees stated in the contract.

The practical priority is to establish which rights are being acquired, when the contract was entered into and who is being paid, before assessing eligibility for deductions. Until the bill becomes law, ‘upfront licence fees may become deductible’ must not be taken to mean ‘all franchise fees are deductible’.