Under section 14 of the IRO, every person who carries on a trade, profession or business in Hong Kong is chargeable to Profits Tax on the profits arising in or derived from Hong Kong from such trade, profession or business.
Section 15(1)(f) of the IRO deems sums received by or accrued to a corporation carrying on a trade, profession or business in Hong Kong by way of interest derived from Hong Kong to be chargeable receipts.
Interest income is chargeable under Profits Tax either under section 14 or 15(1)(f) of the IRO. For the interest income earned by persons other than financial institutions, only interest arising in or derived from Hong Kong is liable to profits tax.
For the purpose of determining the place where interest arises or is derived from, it is the location of the originating cause that normally determines the source. Basically, the place of derivation of interest is the place where the credit was provided to the borrower, i.e., the place where the funds from which the interest is derived were provided to the borrower, commonly known as the "provision of credit" test. This test, however, is not applicable where the loans are not simple loans of money. In the case of a money lending business, the Department will apply the operation test in determining the source of the interest income.
In the present case, the Company is not carrying on a money lending business but just receives interest income by placing its surplus funds with Company S which is incorporated and carries on business outside Hong Kong. The "provision of credit" test will apply in determining the source of the interest income. Since the credit is provided to Company S outside Hong Kong, the interest income does not arise in Hong Kong and thus is not chargeable to Hong Kong Profits Tax.
(This commentary is not a legally binding statement and it does not form part of the Ruling.)