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How to Catch the Candies for Start-ups in Innovation and Technology under the Budget 2018/2019

In recent years, the Hong Kong Government has shown a determination to promote the development of start-ups in Hong Kong. One of the notable measures could be seen in the Chief Executive’s 2017 Policy Address (CE 2017 Policy), where the Hong Kong Government proposed a new two-tiered profit tax regime for enterprises. Under the new regime, the profit tax rate for the first $2 million of profits of enterprises will be lowered to 8.25%, which is half of the standard profits tax rate of 16.5%. The said reform is now part of the Inland Revenue (Amendment) (No. 7) Bill 2017 that was gazetted on 29 December 2017 and is pending the Second Reading at the Legislative Council.

In the Budget 2018-2019, the Hong Kong Government further recognized the innovation and technology (I&T) as one of the major driving forces of the global economic development. With a surplus of $138 billion in 2017-2018, the Hong Kong Government made a bold commitment and earmarked more than $50 billion to support I&T development both in Hong Kong and the greater Guangdong-Hong Kong-Macau Bay Area with Hong Kong taking on a central role. Below we will look at some of the upcoming opportunities available for I&T start-ups to kick-start their businesses.

Developing the Hong Kong-Shenzhen Innovation and Technology Park

• $20 billion will be spent on developing the first phase of the Hong Kong-Shenzhen Innovation and Technology Park (HKSIT Park) in the Lok Ma Chau Loop.
• The HKSIT Park will be administered by a subsidiary of the Hong Kong Science and Technology Park Corporation (HKSTPC).
• The HKSIT Park will provide ample office and research and development (R&D) space for I&T enterprises
• We anticipate that the HKSIT Park will adopt similar funding schemes and incubation programmes currently in place at the Hong Kong Science and Technology Park (Science Park) to attract I&T talents and entrepreneurs.

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Illustration of the Lok Ma Chau Loop

Expanding the Innovation and Technology Fund

• $10 billion will be injected into the Innovation and Technology Fund (ITF), which provides various forms of funding schemes to encourage Hong Kong companies to develop their technological capabilities and introduce business innovations.
• The ITF offers a wide range of I&T programmes that are available to start-ups, including the following:-
  • the Enterprise Support Scheme, which offers up to $10 million funding support for each approved project with further financial assistance to hire up to 2 additional staff;
  • the Technological Start-up Support Scheme for Universities, which provides funding up to $1.2 million per enterprise per year (up to three years) to universities to support their professors and students in starting technology businesses and commercialising R&D results;
  • the Patent Application Grant which provides funding support (up to $250,000 per application) for local enterprises which do not previously own any patent in any jurisdiction, among others, to apply for patents of their own technological inventions;
  • the University-Industry Collaboration Programme, which provides funding support for R&D studentship at local companies (up to $270,000 over three years per studentship), R&D collaboration projects between universities and private companies (up to 50% of the project costs), and industry-oriented R&D projects in the natural science or engineering fields (up to 50% of the project costs);
  • the Research and Development Cash Rebate Scheme, which provides cash rebate equivalent to 40% of the R&D expenditures to projects under the ITF or projects fully funded by the enterprise and conducted by designated local public research institutions;
  • the Technology Voucher Programme, which provides funding support to local enterprises for up to $200,000 per enterprise for technology consultancy, software purchase and subscription and project auditing needs. The eligibility requirements for this program has recently been relaxed; and
  • the Innovation and Technology Venture Fund, which is used to co-invest with partner venture capital funds in local I&T start-ups incorporated no more than 7 years prior to the application with a total number of employees (including those employed by subsidiaries) being less than 250.

Establishing Technology Research Clusters

• $10 billion will be set aside to support the establishment of two research clusters on healthcare technologies and on artificial intelligence and robotics technologies.
• It remains to be seen how the funding will be split between hardware and software development in these fields.

Science Park and Cyberport

• $10 billion will be allocated to Science Park, with about $3 billion to be used for developing physical infrastructure and facilities while about $7 billion will be spent on strengthening tenant support and enhancing the existing incubation programmes, etc.
• $200 million will be allocated to Cyberport to enhance support for start-ups and promote digital technology environment development. This will enable Cyberport to launch a new marketing support scheme for start-ups and increase the financial support under its incubation programme by 50 percent.
• A further $100 million will be allocated to Cyberport to develop the Cyberport Arcade as an e-sports and digital entertainment cluster.

Tax incentives for R&D

• At present, tax deduction for domestic R&D expenditure is 100 percent under s. 16B of the Inland Revenue Ordinance (Cap 112).
• In conjunction with the ongoing profit tax reform, the Government is proposing further tax deduction for domestic R&D expenditure (300 percent tax deduction for the first $2 million qualifying R&D expenditure and 200 percent tax deduction for the remainder) incurred by local enterprises. Drafting of the legislation is underway.

Other Industry-specific Support

• For the construction industry, an initial $1 billion in funding is proposed to be used set up a new Construction Innovation and Technology Fund to encourage enterprises and practitioners in the construction industry to upgrade their technological capabilities, both in terms of knowledge and equipment.
• An $1 billion increase in funding to the CreateSmart Initiative (CSI) is proposed to encourage development of the creative industries, with one of the focuses being to assist start-ups. The funding is anticipated to help expand CSI’s incubation and business collaboration programs that are currently in place.

Conclusion

With a surge in I&T funding support, FinTech and other I&T start-up enterprises in Hong Kong are well positioned to both contribute to and benefit from Hong Kong’s strife to become a regional and international I&T hub. While the current trend lasts, start-ups are encouraged to grasp the opportunity to bring their business to the next level.

How OLN Can Help

At OLN, we offer one-stop services for fintech and other start-up enterprises. If you require any assistance in corporate and commercial advisory, tax planning, intellectual property protection or regulatory issues, please feel free to contact our partner, Anna Chan.