Why use HK as a Licensing and IPRs Transfer Jurisdiction

TAX – Low tax rates

• Profits tax rate 16.5%

• No capital gains tax

• No tax on dividend and other unearned income

• Profits tax chargeable only when the profits arise in or are derived from Hong Kong

• Royalty income subject to profits tax when:
IP rights are used in Hong Kong or the manufacturing or sale of goods in relation to the IP rights takes place in Hong Kong, or when the payer of the royalty can claim tax deductions (Section 15(1)(ba) Inland Revenue Ordinance)

• Royalty income not subject to profits tax (unless the payer of the royalty can claim tax deductions)
when:
IP rights used outside Hong Kong and the manufacturing and sale of goods in relation to the IP rights takes place outside Hong Kong
USE OF SPV

• Parent company transfer all IP rights to Hong Kong SPV subsidiary

• Hong Kong SPV licenses IP rights to licensees and receives royalties

• Benefits of using Hong Kong SPV

• Payment of dividends to parent company is tax free under the current tax system

• Easy to set up SPV and bank accounts

• Low maintenance costs of SPV (filing annual return and tax return, preparing audited
accounts for tax return filing)

• Hong Kong does not practise foreign currency control

• The CEPA arrangement between Hong Kong and PRC allows for possible benefits in entry
into the PRC market

G R E A T E R C H I N A L A W Y E R S
ENFORCEMENT

Certainty of legal system

• Rule of law

• Clean government
Enforcement of foreign judgments

• Established common law rules to recognise and enforce foreign judgments

• Foreign Judgments (Reciprocal Enforcement) Ordinance and other arrangements for
reciprocal enforcement of judgments with some countries provide a mechanism for enforcing
foreign judgments in Hong Kong by means of a registration procedure

SPV STRUCTURE

Note: There may be transfer pricing issues when transferring the IP rights to SPV. For instance,
if PRC IP rights are transferred from a China entity to SPV. – Article 41 Enterprise Income Tax Law of the PRC (EIT)

– If the transaction between the parent company and the SPV does not comply with the arm’s
length principle, thus reducing the taxable income or revenue of the enterprise or the
associated party, the tax authorities shall be empowered to make adjustments reasonable
methods.

Dividends (no tax)

• Many Chinese companies choose Hong Kong as trading hub due to lower tax rates and
relative ease with foreign exchange controls

• Such trading companies are sometimes used as a vehicle for infringement

• When infringement actions happen in Hong Kong, legal actions can be brought against
infringers. Effective and efficient customs protection of IP
rights

• There is the Intelligence and Investigation Branch for IP Protection in the Hong Kong Customs

• Cases can be reported by 24-hour hotline, fax or mail

• Customs and Excise Service Ordinance

• Broad powers of search and seizure

• May search without warrant any ship, aircraft, train or vehicle (other than ships of war and
military aircrafts)

• Anywhere in Hong Kong, not just harbour or borders
Protection of unregistered rights

• Unregistered trademark protected by common law passing off

• Copyrights protected through international treaties like the Berne Convention

Please note that the information and opinions contained in this memo are intended to provide a general overview only, and should not
be treated as a substitute for proper legal advice concerning an individual situation. We disclaim all liability to any person in respect
of the consequences of anything done or omitted to be done wholly or partly in reliance upon the contents of this newsletter. Readers
should make their own enquiries and seek appropriate legal advice on the particular facts and circumstances at issue.

Should you have other enquiries, please feel free to contact us.

© Vivien Chan & Co., April 2011