Advance Ruling Case No. 12

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Advance Ruling Case No. 12

1. The provisions of the Ordinance

This ruling applies in respect of section 14 of the IRO.

2. Background

(a)	A private limited company (the HK Company) was incorporated in Hong Kong in February 2000.
(b)	It involves in the trading of computer commodities, motherboards and chips etc.
(c)	Other than the registered address (which is the address of the company secretary - an independent service provider responsible for annual return filing to Companies Registry), the HK Company does not maintain any office nor employ any staff in Hong Kong.
(d)	A NIL Profits Tax Return was submitted by the HK Company for the Year of Assessment 2000/01 as it claimed that there was no trading during the period from incorporation to 31 December 2000.
(e)	The directors of the HK Company are all Taiwanese residents. The ultimate holding is T Ltd, a company listed in the Taiwan Stock Exchange. Besides, the Group has set up a manufacturing plant in Shenzhen in July 2000 under the name M Ltd in order to expand its manufacturing operations and to benefit from the low production overheads in the Mainland. The directors of T Ltd and M Ltd are also Taiwanese residents. The directors are not required to carry out any duties or make any decisions for the HK Company in Hong Kong.
(f)	The HK Company commenced business with T Ltd and M Ltd in 2001/02.
(g)	The suppliers and customers of the HK Company are limited to the overseas group companies.
(h)	The HK Company holds bank accounts with both Hong Kong and Taiwan banks. Staff of T Ltd are responsible to and authorized to handle the bank transactions on behalf of the HK Company.
(i)	As the HK Company does not have its own staff in Hong Kong, all the purchases and sales transactions with T Ltd and M Ltd are carried out by staff of T Ltd in Taiwan.

3. The arrangement

(a) The HK Company is set up as an intermediary to facilitate trading between Taiwan and the Mainland.

(b) T Ltd would source raw materials from suppliers in Taiwan and overseas and the raw materials would be processed by M Ltd in the Mainland.

(c) The raw materials required by M Ltd have to be imported in name of the HK Company. M Ltd would issue purchase orders, being addressed to the HK Company, to T Ltd for the purchasing and importation of raw materials. The HK Company would charge a certain mark-up for the sale of raw materials to M Ltd.

(d) The staff of T Ltd in Taiwan, on behalf of the HK Company, would confirm and sign on the purchase orders received and prepare the sales invoice and packing list to M Ltd.

(e)
M Ltd would process and assemble the raw material into finished goods. The finished goods manufactured by M Ltd would be exported and sold to the HK Company instead of T Ltd directly. T Ltd would then issue purchase order to the HK Company simultaneously regarding the purchase of the same. No mark-up would be charged for the sale of finished goods from the HK Company to T Ltd.

(f)
T Ltd would sell the goods to ultimate customers, including both independent customers and group companies in Taiwan and overseas.

(g)
No stock of raw materials or finished goods would be kept in Hong Kong. The raw materials would be delivered from T Ltd or other suppliers and imported to Shenzhen directly. The finished goods might be shipped directly from the manufacturing plant in Shenzhen or passed through Hong Kong for transshipment to T Ltd or its ultimate customers.

(h)
Besides making sales to T Ltd, the HK Company has also made minor sales to other overseas group companies in Mexico and Japan. There is no mark-up charged in respect of purchase of raw materials from nor sale of finished goods to the Mexican Company but a prescribed mark-up is charged for the sale of parts to the Japanese Company.

(i) The HK Company would book the profits derived from the trading transactions entered by the group companies.

4. The ruling

The existence of the HK Company is to facilitate trading between Taiwan and the Mainland and the profits booked in the accounts of the HK Company are not subject to Hong Kong Profits Tax.

5. The period for which the ruling applies

This ruling will apply for the year of assessment 2002/03 and subsequent years of assessment.

6.	The material assumptions in respect of a future event or any other matter made by the Commissioner

The ruling is based on the assumption that the operations of the HK Company would remain the same and the role of the HK Company would follow the contemplated operational transactions.

7. Date of ruling issued

6 June 2003.


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