Advance Ruling Case No. 72

The provisions of the Ordinance

The ruling applies in respect of sections 15H, 15M and 15N of the Inland Revenue Ordinance (“IRO”).

Background

(a)

The Applicant is a private limited company incorporated in Hong Kong and is carrying on a business in Hong Kong. It set up two wholly owned subsidiaries, namely Company F1 and Company F2, in Jurisdiction F in 2019 and 2020 respectively.

(b)

Company F1 is engaged in manufacturing and sale of electronic products. It has acquired substantial fixed assets and employed numerous staff to maintain a factory in an industrial park in Jurisdiction F and carries out substantive activities in the factory for generating income.

(c)

The enterprise income tax rate of Jurisdiction F is 20%. Jurisdiction F has implemented a tax incentive under which tax exemption for 2 years and reduction of 50% of tax payable for the next 4 years (“the Tax Concession”) would be granted for income from performing new investment projects in certain industrial parks.

(d)

Since Company F1, together with its factory, is situated in an industry park covered by the Tax Concession of Jurisdiction F, it has qualified for the Tax Concession. Company F1 is entitled to enterprise income tax exemption for 2 years ended 31 December 2020 and 2021, and a 50% reduction of enterprise income tax payable for a period of 4 subsequent years from 31 December 2022. Company F1 paid tax on its profits for the year ended 31 December 2022 in Jurisdiction F.

The arrangement

(a)

Company F1 will distribute dividend (“the Dividend”) in cash to the Applicant in 2023 out of its retained earnings as at 31 December 2022.

(b)

The Dividend will be paid to the Applicant’s bank account in Jurisdiction X. It will then be remitted to a bank account of Company F2 in Jurisdiction F as the Applicant’s capital investment by way of subscription of new shares to be issued by Company F2. The Dividend will not be used to satisfy any debt incurred in respect of the trade, profession or business carried on by the Applicant in Hong Kong.

The ruling

(a)

The Dividend shall not be regarded as received in Hong Kong under section 15H of the IRO, and section 15I shall not apply to bring the Dividend under the charge of profits tax in Hong Kong.

(b)

Even if the Dividend is regarded as received in Hong Kong by virtue of section 15H of the IRO, section 15I shall not operate in relation to the Dividend as the conditions for the participation requirement under section 15M are satisfied.

(c)

For the purposes of section 15N, the underlying profits of the Dividend (i.e. profits of Company F1) have been subject to a qualifying similar tax in Jurisdiction F.

The period for which the ruling applies

The ruling applies for the year of assessment 2023/24 and subsequent years of assessment.

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

There is no assumption made by the Commissioner.

Date of ruling issued

12 September 2023