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Advance Ruling Case No. 27


1. The provisions of the Ordinance

  This ruling applies in respect of section 20(2) of the Inland Revenue Ordinance ("IRO").

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2. Background

(a) S Ltd was incorporated in Hong Kong. It provides technical, marketing and other auxiliary administrative support services, and is engaged in spare parts trading. Its profits will be subject to Hong Kong Profits Tax.
(b) It is a wholly-owned subsidiary of P Ltd, which was incorporated in Country Y.
(c) P Ltd is principally engaged in manufacturing and distribution of machineries in Europe, USA and Asia.

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3. The arrangement 

(a) P Ltd will enter into an agreement with S Ltd.
(b) S Ltd will provide support services including: -
  (i) Presenting the catalogue of P Ltd's products to P Ltd's customers;
  (ii) Carrying out market research and pass the information to P Ltd;
  (iii) Providing assistance to P Ltd in trade fairs or exhibitions;
  (iv) Helping to follow up with P Ltd's customers on the overdue trade debts;
  (v) Performing installation, training and maintenance services to P Ltd's customers in Hong Kong or elsewhere.
(c) In return for the services performed, P Ltd will pay S Ltd a fee calculated at a 10% mark-up on the actual cost incurred.
(d) Under the agreement, S Ltd will not be given any authority to negotiate or conclude any purchase / sales contracts on behalf of P Ltd, to place purchase orders or accept sales orders on behalf of P Ltd, to maintain any inventory for P Ltd in Hong Kong, to establish any branch or maintain any distribution depot for the sale of products of P Ltd in Hong Kong.

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4. The ruling

  Section 20(2) of the IRO does not apply to the Arrangement.

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5. The period for which the ruling applies

  The ruling will apply for the year of assessment 2006/2007 and subsequent years of assessment.

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

  The Commissioner has assumed that the arrangement would be implemented in the way stated in the ruling application and the ruling.

 

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7 . Date of ruling issued 

  5 June 2006.

 

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8. Commentary  

 

Under Section 20(2) of the IRO, where a non-resident person carries on business with a closely connected resident person and the course of such business is so arranged that it produces to the resident person either no profits or less than the ordinary profits, such business shall be deemed to be carried on in Hong Kong and the profits of the non-resident person from such business shall be assessable and chargeable to profits tax in name of the resident person. In the present case, the arrangement has produced to S Ltd profits that are not less than the ordinary profits, therefore Section 20(2) does not apply.

 

(This commentary is not a legally binding statement and it does not form part of the Ruling.)