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Publications
and Press Releases : Advance
Ruling Cases : Advance Ruling Case No. 34
Advance Ruling Case No. 34
| 1. |
The
provisions of the Ordinance |
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This ruling applies in respect
of section 14 of the Inland Revenue Ordinance. |
| 2. |
Background |
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(a) |
The Company is incorporated
in Hong Kong and is primarily engaged in the distribution
of the products ("the Products") of a group
of companies ("the Group") in Hong Kong and
Asia. |
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(b) |
The Products are manufactured by the factories of the Group outside Hong Kong. |
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(c) |
As part of the business plan
of the Group to further expand into the markets in Asia
and in particular South East Asia ("SEA"), the
Company is contemplating to set up a branch in Country
X in South East Asia ("the Branch"). |
| 3. |
The
arrangement |
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(a) |
The Branch will
initially employ 26 personnel, with 22 in the sales department,
3 in the marketing department, and 1 in accounting. |
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(b) |
The Branch will purchase the
Products directly from Group factories at arm's length
prices and will sell the Products to distributors/customers
in the countries in SEA based on mutually agreed prices.
All purchase and sale contracts will be negotiated, concluded
and executed by the personnel of the Branch and will be
conducted outside Hong Kong. All purchase and sale orders
will be received and approved by the Branch in Country
X. |
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(c) |
The Company in Hong Kong will
not be involved in the negotiation or conclusion of the
purchase or sale of the Products. In addition, it will
not be involved in receiving or approving the purchase
orders from the distributors/customers. |
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(d) |
The management is setting
up a bonded warehouse in Country X to provide storage
facilities to the Products. The Products may be consolidated
first in the warehouse or shipped directly to the other
countries in SEA depending on logistic and transportation
needs of the distributors/customers in SEA from time to
time. |
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(e) |
The Branch will have bank accounts in Country X. All payments to factories and receipts from customers will be handled by the personnel of the Branch through the bank accounts in Country X. All trade finance arrangements such as letters of credit, guarantees, etc will also be handled by the personnel of the Branch through the bank accounts in Country X. |
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(f) |
To achieve economic efficiency, the Company in Hong Kong will provide IT, finance, accounting, research and other administrative support to the Branch. The costs and expenses incurred by the Company in Hong Kong in providing the aforesaid services to the Branch will be allocated by the Company to the Branch for statutory reporting in Country X. |
| 4. |
The
ruling |
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The Profits to be derived by the Branch are offshore sourced and will not be taxable under Section 14 of the Inland Revenue Ordinance. |
| 5. |
The
period for which the ruling applies |
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This ruling will apply for
the year of assessment 2007/08 and subsequent years of
assessment. |
| 6. |
The
material assumptions in respect of a future event or any
other matter made by the Commissioner |
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The Commissioner has assumed that the subject trade transaction will be implemented in the way stated in the ruling application and the ruling. |
| 7. |
Date
of ruling issued |
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10 August 2007. |
| 8. |
Commentary |
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Under Section 14 of the Inland Revenue Ordinance, every person who carries on a trade, business or profession in Hong Kong is chargeable to profits tax on the profits arising in or derived from Hong Kong. In the present case, the Branch is considered a permanent establishment of the Company in Country X where all the purchase and sales contracts of the Branch will be initiated, negotiated, concluded and executed by the personnel of the Branch. The functions provided by the Company in Hong Kong are considered ancillary in nature. Therefore, section 14 does not apply to the profits to be derived by the Branch. |
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(This commentary is not a legally binding statement and it does not form part of the Ruling.) |
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