IP Licensing Agreement: A Drafting Guide for Hong Kong and Cross-Border Deals

An IP licensing agreement is a contract granting permission to use one or more intellectual property rights. The licensor remains the owner of the underlying right; the licensee is given a defined scope of permitted use. This distinguishes a licence from an assignment, under which ownership of the IP itself transfers to the assignee.

Licences are commonly used for technology transfer, brand extension, content distribution, manufacturing rights, software deployment and franchising. The structure can range from a simple short-form trade mark licence to a complex patent pool with multiple licensees, geographies and royalty tiers.

Hong Kong recognises and protects the standard categories of intellectual property, each governed by its own ordinance and licensing practice.

The structural choice between exclusive, sole and non-exclusive licences shapes the commercial value of the deal and the regulatory considerations that apply.

The licensor may grant multiple licences over the same scope to different licensees. The licensor retains full freedom to license the IP to others and to use it itself. Non-exclusive licences are common for mass-market technology, brand licensing programmes and standard software deployment.

Two or more parties licence their respective IP to each other, typically to enable joint development, freedom to operate or settlement of IP disputes. Common in technology sectors with overlapping patent portfolios.

The substantive clauses of an IP licence work together to define the bargain. The following are the load-bearing elements in any well-drafted licence.

Royalties can be structured in several ways. The choice depends on the predictability of the licensee’s revenue stream, the willingness of the licensor to share downside risk, and the negotiating position of each party.

• Lump-sum payment. Single payment at signing or on milestones. Predictable for both parties; less aligned with commercial success.
• Running royalty. A percentage of net sales of the licensed product. Most common structure for commercialised IP. Requires clear definition of the royalty base.
• Minimum royalties. Annual or quarterly minimums to ensure the licensor receives a baseline return regardless of licensee performance. Often combined with running royalties.
• Milestone payments. Defined sums payable on the achievement of agreed milestones (regulatory approval, first commercial sale, sales thresholds). Common in pharmaceutical and technology licences.
• Tiered royalties. Royalty rate increases or decreases with sales volume. Used to incentivise the licensee or reward scale.

Where royalties are paid from Hong Kong to a non-resident licensor for the use of intellectual property in Hong Kong, Hong Kong withholding tax applies. The effective rate for non-resident corporations is generally 4.95% (calculated as 30% deemed assessable profits multiplied by the standard Profits Tax rate of 16.5%). The effective rate can rise to 16.5% (and 15% for non-resident individuals) where the non-resident recipient is an associate of the Hong Kong payer and the IP was previously owned by a person carrying on a trade or business in Hong Kong, an anti-avoidance provision designed to address transfer pricing risks.

Hong Kong has signed over 50 comprehensive double tax agreements, which may reduce the applicable royalty rate where the non-resident licensor is tax-resident in a treaty jurisdiction. Where the foreign jurisdiction is the source of the royalties (Hong Kong recipient claiming treaty benefits abroad), a Hong Kong Certificate of Resident Status is obtained from the IRD on Form IR1313A (Mainland China DTA) or Form IR1313B (other DTAs). Where Hong Kong is the source (non-resident licensor receiving HK-source royalties), the relevant treaty position is determined under the applicable DTA between Hong Kong and the licensor’s tax residence jurisdiction.

Hong Kong has introduced tax concessions for the licensing and commercialisation of qualifying intellectual property held by Hong Kong taxpayers. These provisions can deliver materially lower effective tax rates on qualifying IP income, subject to substance and nexus requirements. Detailed analysis is required to confirm eligibility on a case-by-case basis. For the related concession on carried interest from PE funds, see our Private Equity practice page.

Foreign licensors licensing IP for use in Hong Kong should ensure that the underlying IP is properly protected locally (registered where applicable), that the licence agreement is enforceable under the chosen governing law, and that withholding tax obligations on the Hong Kong licensee are addressed. Recordal of certain licences at the relevant HK Registry can support enforcement against third parties.

Licensing Hong Kong-owned IP into the Mainland requires consideration of PRC registration and recordal rules, currency controls on royalty remittances, PRC withholding tax, and the practical realities of IP enforcement in the Mainland. Many Hong Kong groups structure inbound and outbound IP arrangements through dedicated IP holding companies.

Hong Kong follows an international exhaustion regime for trade marks and certain other IP rights, meaning that goods placed on the market in any jurisdiction by or with the consent of the IP owner can generally be resold without infringement. This has practical consequences for licensing strategy in regional markets, particularly where parallel imports are anticipated. See our distribution agreement guide for the related channel-side considerations.

Hong Kong is party to a network of international IP treaties, including the Paris Convention, the Berne Convention, the WIPO Copyright Treaty and the TRIPS Agreement. Cross-border licences should be drafted with these frameworks in mind, particularly where the licensee operates in multiple jurisdictions.

• Vague grant clauses. A grant of ‘rights to use’ without specifying which rights, what scope and what duration, is the single most common source of post-signing licence disputes.
• Missing quality control for trade mark licences. Trade mark licences without effective quality control can compromise the licensor’s mark and expose it to challenge.
• No audit rights. Without contractual audit rights, the licensor has no means of verifying royalty-bearing sales beyond the licensee’s self-reporting.
• No sub-licensing controls. Silence on sub-licensing can be interpreted as permitting it; explicit prohibition or controlled permission is required.
• Improvements not addressed. Failure to allocate ownership of improvements developed during the licence term can create downstream disputes.
• Choice of law not aligned with enforcement strategy. Licensing IP for use in multiple jurisdictions requires a governing law and forum selection that supports practical enforcement.

IP licences typically provide a layered set of remedies for breach, escalating with the severity and persistence of the default.

• Notice and cure. Most material breach clauses require written notice and a defined cure period before termination rights crystallise.
• Termination. For uncured material breach, insolvency or change of control, the licensor can terminate the licence with immediate effect.
• Accounting and damages. The licensor can claim unpaid royalties, audit costs and consequential damages, subject to any contractual cap.
• Injunctive relief. Where the licensee continues using the IP after termination or exceeds the licensed scope, the licensor can seek interim and final injunctions in the courts.
• Additional damages and statutory remedies. Under the Copyright Ordinance (Cap. 528), courts may award additional damages for infringement (taking into account the flagrancy of the infringement, benefit accrued to the infringer, and other statutory factors expanded by the Copyright (Amendment) Ordinance 2022). Under the Trade Marks Ordinance (Cap. 559), the proprietor of a registered mark may claim damages, an account of profits, an order for delivery up and other relief under section 22, alongside any contractual remedies in the licence.