Why Hong Kong? 

Aligned with the “Outline of the 14th Five-Year Plan for National Economic and Social Development of the People’s Republic of China and Long-Range Objectives Through the Year 2035” (the “14th Five-Year Plan”) promulgated in 2021, Hong Kong is designated to develop into an international innovation and technology centre and a regional intellectual property (IP) trading hub.

With its uniquely strategic position, Hong Kong offers a well-rounded environment for technology companies to establish their research and development (R&D) and IP centers. Its dynamic ecosystem, charaterised by a high concentration of international investors, a sophisticated financial infrastructure and proximity to major Asian markets, provides fertile ground for both technological innovation and capital formation.

For companies seeking global expansion and access to capital markets, establishing R&D operations in Hong Kong presents a compelling strategic advantage. As one of the world’s leading IPO venues1 and Asia’s top destination for biotechnology listings2, Hong Kong combines financial depth with innovation-driven growth.

As the region’s premier international financial center, Hong Kong offers deep and liquid capital markets, a robust legal framework and world-class IP protection, ensuring a secure and transparent foundation for innovation. Its proximity to Mainland China and integration with the Greater Bay Area further strengthens its role as a gateway to one of the world’s largest consumer and manufacturing markets.

Ranked among the world’s top 10 for frontier-tech readiness2, Hong Kong boasts advanced infrastructure supporting AI, biotech, fintech and green technologies. Generous government funding schemes and tax incentives further enhance its appeal. With unmatched strengths in finance, legal infrastructure and strategic location, Hong Kong fosters an R&D ecosystem where breakthroughs become businesses, and ideas become global assets.

 

Small and Medium-sized Enterprises (SMEs)

SMEs form the backbone of Hong Kong’s economy, accounting for more than 98% of enterprises and employing around 45% of the private sector workforce in the city3. They are vital drivers of innovation and economic growth within the middle market. 

Hong Kong’s R&D ecosystem is designed to be inclusive, with generous tax deductions and targeted funding schemes that make it especially attractive for SMEs to innovate and grow.  This supportive environment has led to remarkable growth in the city’s technology sector. 

Over the past five years, the number of technology companies operating in the Hong Kong Science Park has increased by more than 127%, while its working population has grown by approximately 83%.  From 1 April 2023 to 31 March 2024, companies in the Science Park achieved 15 IPOs and collectively raised HK$12 billion in funding4. These figures underscore the strength and momentum of Hong Kong’s innovation ecosystem, particularly for emerging and growth-stage enterprises.

 

Funding and Cash Flow Support for SMEs5

The Innovation and Technology Fund (ITF) is a flagship government initiative that promotes technological advancement and innovation across industries, with a strong emphasis on supporting SMEs. Administered by the Innovation and Technology Commission, the ITF comprises multiple funding schemes to encourage R&D, commercialisation and technology adoption.

A key component is the Enterprise Support Scheme (ESS).  Launched in 2015, the ESS provides financial support to local companies, including SMEs, for conducting in-house R&D projects that promote technological innovation and industry advancement. Funding is offered on a dollar-for-dollar matching grants of up to HK$10 million per approved project. Intellectual property (IP) rights generated from these projects must be owned by the Hong Kong applicant company. There is no requirement to repay the government’s contribution or share commercialised results. 

There are also other funding schemes available such as the Research Talent Hub, New Industrialisation Support Scheme and Mainland-Hong Kong technology Cooperation Funding Scheme, each targeting different stages of innovation with distinct eligibility requirements and objectives. Collectively, these initiatives provide tailored financial support to boost Hong Kong’s technology-driven economy. 

 

Incubation Programmes for Local Technology Start-ups and Entrepreneurs

Incubation programmes such as HKSTP Incubation, Incu-Bio and the Cyberport Incubation Programme provide funding, mentorship and infrastructure support to startups and early-stage SMEs with strong R&D components.

Incubation ProgrammesDurationFunding SupportTarget GroupOther Benefits
HKSTP Incubation63 yearsUp to HKD 1.29 million to cover technology and business development expenses Technology start-up Access world-class equipment, software and lab facilities, mentorship, investor matching
Incu-bio4 yearsUp to HK$6 million (HK$4 million financial subsidy and HK$2 million funding for regulatory activities such as clinical trials)Biomedical tech start-upWorkspace support at preferential rates, technical and business support, access to mentors and strategic partners.
Cyberport Incubation Program72 yearsUp to HK$500,000 in financial assistance, and HK$200,000 on-site rental subsidySmart-living start-ups Technical and business support; networking opportunities

Each programme has sector-specific criteria and offers a blend of financial aid, infrastructure and strategic support to help entrepreneurs thrive in Hong Kong’s innovation ecosystem.

 

Maximising R&D and IP-Related Tax Benefits in Hong Kong

R&D Super Deduction

The R&D Super Deduction  allows a 300% tax deduction on the first HK$2 million of qualifying R&D expenses (referred to as Type B expenditure) and 200% on the remainder, with no upper limit. This applies to all companies conducting eligible R&D activities in Hong Kong, including SMEs.  

To qualify, R&D activities must be performed locally, and expenses must be exclusively and directly related to such activities. SMEs can also benefit from the R&D Super Deduction for outsourced R&D performed by designated local research institutions under appropriate cost-recharge arrangements. By contrast, Type A expenditure only qualifies for the standard 100% deduction.  

Taxpayers are required to complete Supplementary Form S3 – Expenditure on Research & Development, detailing Type A and Type B expenses for each R&D project alongside their profits tax return. Accurate classification is crucial to avoid disallowances, unnecessary tax costs or compliance risks. 

 

Patent Box Regime

Effective from 2024, Hong Kong’s new “Patent Box” tax incentive offers a concessionary 5% tax rate on profits derived from eligible IP (such as patents, plant variety rights and software copyrights) developed through R&D activities. This measure reinforces Hong Kong’s role as a regional IP trading hub and supports innovation-driven growth.  

 

Tax and Transfer Pricing Considerations

SMEs engaged in cross-border R&D or IP transactions must proactively manage transfer pricing arrangements to ensure compliance with Hong Kong’s adoption of the OECD Transfer Pricing Guidelines.

Applying the arm’s length principle and maintaining comprehensive documentation is essential. A critical component is the application of the DEMPE framework, which evaluates the Development, Enhancement, Maintenance, Protection, and Exploitation of IP. In China, the model expands to DEMPEP, incorporating “Promotion” to reflect the value of localised marketing intangibles.

SMEs should clearly identify which entities perform these functions and allocate profits based on genuine value creation and economic substance. Weak or inadequate transfer pricing policies may result in tax adjustments, penalties, or forfeiture of incentives.

To optimise tax benefits and mitigate compliance risks, businesses should align their tax planning with operational substance, maintain transparent records, and seek professional guidance when structuring cross-border IP arrangements.

 

Outlook 

Hong Kong is rapidly emerging as a global hub for artificial intelligence, driven by strategic investments in infrastructure, research, and industry transformation. 

The 2025–26 Budget outlines several initiatives:

  • Launch of the AI Supercomputing Centre at Cyberport, already in its first operational phase and expected to reach 3,000 petaFLOPS of computing power by end-2025.
  • Establishment of the Hong Kong AI Research and Development Institute, backed by HK$1 billion in funding, which will drive upstream AI research, industrial applications, and integration of existing research entities.  
  • A HK$10 billion Innovation and Technology Industry-Oriented Fund to channel more market capital into emerging and strategically significant industries.
  • The Hong Kong government will also review the relevant tax deduction arrangements to accelerate the development of IP-intensive industries and IP trading. 

These efforts, coupled with integration into the Greater Bay Area, position Hong Kong as a gateway for cross-border collaboration in AI, semiconductors and next-generation technologies.

 

Conclusion

As Hong Kong strengthens its position as a regional innovation and IP hub, supported by strategic investments in AI, infrastructure and industry transformation, SMEs have a unique opportunity to scale their R&D capabilities and participate in cross-border collaboration.

In today’s competitive landscape, the ability to adopt and integrate technology and intellectual property will define future market leaders. While innovation should not be tax-driven, overlooking tax implications may lead to missed opportunities or unnecessary administrative burdens. Early consideration of tax impacts, such as the Patent Box Regime and R&D Super Deduction, can help streamline implementation, enhance compliance and maximise incentives. 

Engaging tax professionals early in the process helps ensure that eligible incentives, such as additional deductions for qualifying R&D expenditure, are fully captured and that R&D and IP structures are optimised for both operational and tax efficiency. 

At RSM, we are committed to helping businesses navigate this complexity and optimise their tax position, so they can focus on what matters most: driving innovation and growth through AI and technology.

 

References

For more information, get in touch with our professionals

Joanna Lam
Managing Partner, Tax & Advisory
Vivian Chan
Director, Transfer Pricing