Advance Ruling Case No. 23

1. The provisions of the Ordinance

This ruling applies in respect of section 14 of the Inland Revenue Ordinance.

2. Background

(a)

Company A was incorporated in Hong Kong and is a wholly owned subsidiary of Company B, a company incorporated overseas.

(b)

Company B is engaged in the retailing of fashion wears, cosmetics and accessories mainly in the European countries and the United States through its own outlets. It has appointed Company A as its buying agent to procure overseas suppliers and source garments, including knitwear, underwear, woven and accessories in the Mainland and other Asian countries.

(c)

Due to geographical locations of overseas suppliers, Company A has established numerous representative offices in various overseas countries to perform the procurement services to Company B. The representative offices do not have the authorities to negotiate, conclude or execute sales and purchases of Company B. The terms of sales and purchases are negotiated and concluded by Company B with the suppliers directly outside Hong Kong. Once the contracts are concluded, Company B will instruct the representative offices to follow up the orders with the suppliers.

(d)

Company A receives commission income from Company B for the procurement services rendered outside Hong Kong at 3% on the FOB value of the purchases for Company B.

(e)

Company A does not employ any staff in Hong Kong. It has engaged Company C, its fellow subsidiary in Hong Kong as its service agent to perform the necessary administrative functions and pays a service fee for the services rendered on a cost plus 5% basis.

3. The arrangement

(a)

Company A currently maintains a number of representative offices outside Hong Kong, three of which are located in Shanghai, Beijing and Guangzhou to perform the procurement activities in the Mainland.

(b)

Company A is considering setting up Company D in the Mainland with branches in Shanghai, Beijing and Guangzhou to take over the functions currently performed by the three representative offices.

(c)

The Shanghai, Beijing and Guangzhou representative offices of Company A will be closed down completely subsequent to the commencement of operation of Company D. The staff of the three representative offices now station in the Mainland will be transferred to Company D and work for the latter thereafter.

(d)

Company A will enter into a Service Agreement with Company D outside Hong Kong to engage the latter to perform the procurement services in the Mainland for Company B. Under the agreement, Company A will pay a service fee to Company D for the services rendered on a cost plus 10% basis.

(e)

Company A will continue to receive commission income from Company B on the same basis as before.

(f)

Company A will continue to appoint Company C as its service agent to perform the necessary administrative functions and will pay it a service fee on the same basis as before.

4. The ruling

Company A will not be subject to profits tax on the commission income derived from Company B for the procurement services rendered by Company D outside Hong Kong in respect of its participation in the arrangement.

5. The period for which the ruling applies

The ruling will apply for the year of assessment 2006/07 and subsequent years of assessment.

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

There is no assumption made by the Commissioner.

7 . Date of ruling issued

15 August 2005.