The Government published in the Gazette on 2 Nov 2018 regarding the Inland Revenue (Amendment) (No. 7) Ordinance 2018 to implement the initiative announced in the Chief Executive’s 2017 Policy Address of providing enhanced tax deduction for the expenditures incurred by enterprises on research and development (R&D) activities in Hong Kong.

The Ordinance stipulates that R&D expenditures are now classified into either “Type A expenditures” which qualify for 100 per cent deduction or “Type B expenditures” which qualify for enhanced tax deduction. The enhanced tax deduction for “Type B expenditures” is a two-tier deduction regime. The deduction is 300 per cent for the first $2 million 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 per cent 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.