Advance Ruling Case No. 4

1. The provisions of the Ordinance

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

2. Background

(a)

The Company was incorporated in Hong Kong on 31 March 1999. Its business is the trading of accessories.

(b)

It maintains a registered office in Hong Kong through a local accounting firm (the Hong Kong Office).

(c)

The beneficial owner of the Company is Mr A who is the sales manager of Company B, which is a company incorporated in Australia and is a major supplier of the Company.

(d)

Mr A is responsible for negotiation and conclusion of sales and purchase contracts, for both Hong Kong and overseas sales. He ordinarily lives in Australia and visits Hong Kong at intervals of about three months.

(e)

The local accounting firm will perform documentation and other administrative works, such as preparing purchase and sales orders, invoices, operating bank accounts and maintaining accounting records, under instructions from Mr A.

(f)

The goods are mainly sourced from overseas suppliers. The local accounting firm places the purchase orders to the suppliers and accepts sales orders from customers in Hong Kong under Mr A's instructions. The suppliers then send the invoices, packing lists and other documents to the Hong Kong Office.

(g)

The suppliers deliver the goods to the Company for sales to local and other overseas customers and the goods are kept in warehouses in Hong Kong.

(h)

The Company pays the suppliers by L/C and T/T and receives settlement from customers by L/C.

3. The arrangement

(a)

A PRC agent is appointed by Company B to act as its agent for the sales of accessories to a customer in PRC.

(b)

Mr A negotiates with the PRC customer and the said PRC agent directly for price, quantity, quality and shipment of the sales and at the same time negotiates with the supplier in Italy for price, quantity, production schedule and delivering of the goods.

(c)

Upon confirmation of sales, Mr A will ask the PRC customer to issue purchase orders to the Hong Kong Office directly and at the same time inform the local accounting firm of the details of the transactions. Then the local accounting firm will place purchase orders to the Italian supplier in accordance with Mr A 's instructions. The goods are shipped to the PRC customer directly.

(d)

The settlement from the customer and to the supplier are by L/C on a back-to-back basis arranged by the local accounting firm.

4. The ruling

The profits arising from sales made to the PRC customer are onshore profits subject to Hong Kong Profits Tax.

5. The period for which the ruling applies

This ruling will apply for the year of assessment 2000/2001 and subsequent years of assessment.

6 . Date of ruling issued

11 September 2001.