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Advance Ruling Case No. 6


1. The provisions of the Ordinance

  This ruling applies in respect of sections 16 and 22(3) of the Inland Revenue Ordinance ("IRO").

 

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2. Background

  "A Co.", "B Co." and "C Co." are three partnerships engaged in the business of provision of professional services in Hong Kong. "A Co." was formed and commenced business on 1 January 2001 whereas "B Co." and "C Co." commenced business on 1 February 2001.

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3. The arrangement 

(a) The three professional practices engaged M Ltd., a company incorporated in Hong Kong and mainly owned by the partners of "A Co.", "B Co." and "C Co.", to provide administrative and management services for the practices operated by them. M Ltd. will also licence the three professional practices for the use of its trademark. In return, the three professional practices would pay M Ltd. service fees and licence fees for the services rendered and for the trademark licenced to them.
(b) The management fee and licence fee income received by M Ltd. will be fully subject to Hong Kong Profits Tax. The payment of the fees, in essence, channels the income of the three professional practices to M Ltd. In other words, the profits, if any, originally earned by the three professional practices would be taken up by M Ltd. through the payment of management fees and licence fees, leaving the three professional practices with zero profit.

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4. The ruling

(a) The management fees and licence fees paid by the three professional practices to M Ltd. are not deductible under section 16(1) of the IRO because the purpose of the payment is to strip the profits from the practices.
(b) Whether or not section 22(3) of the IRO will apply to the professional practice depends on whether or not the conditions set out in section 22(3) are satisfied, the "mode of operation" (i.e. the payment of management fees and licence fees) being irrelevant.

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5. The period for which the ruling applies

  This ruling will apply in the year of assessment when the three professional practices commence their businesses 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

(a) The management and licencing fees paid by the three professional practices to M Ltd. are fully subject to Hong Kong Profits Tax in the hands of the recipient.
(b) M Ltd. will not be run in accordance with the service company "Type II" arrangement as described in the Departmental Interpretation & Practice Note No. 24 and no private expenses of the partners (or their spouses) of the three professional practices shall be charged in the accounts of M Ltd.

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7 . Date of ruling issued

  15 November 2001.