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Advance Ruling Case No. 16

1. The provisions of the Ordinance

  This ruling applies in respect of section 14 of the Inland Revenue Ordinance ("IRO").

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2. Background

(a) Company A was incorporated in Country X as a limited liability company. It has its central management and control in Country X and does not have any business establishment in Hong Kong. It is a wholly owned subsidiary of Company B, an overseas incorporated bank.
(b) Company A has a branch in London ("A-London") which carries on business in London. It has three main business lines, namely, equity derivatives, cash equity sales and trading, and corporate advisory.
(c) Company B maintains a branch office in Hong Kong ("B-HK"). It principally engages in corporate banking, corporate finance and mergers and acquisition.

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3. The arrangement

(a) The equity derivative business of Company A consists of structuring, risk management and the trading of equity-linked and fund-linked products, both listed and over-the-counter. Company A acts as the issuer of these products which are sold to retail banking customers, private banks (with European and Asian institutional client bases), financial institutions and pension funds.
(b) A-London has engaged B-HK to provide liaison and support services to clients in Asia in relation to Company A's equity derivatives business. Under the arrangement, B-HK will designate one liaison staff to perform the services.
(c) The liaison and support services include :-
  (i) marketing proposed products to clients;
  (ii) explaining products to clients;
  (iii) dealing with general enquiries and complains and reverting the same to A-London and
  (iv) communicating after-sales services requests to A-London.
  The liaison staff is also involved in providing feedback from the clients to Company A so as to modify the products and contacting the private banks and financial institutions to market the products. The role of the liaison staff is to act as a link between the clients and Company A in London. If the clients have any specific requirements, the liaison staff can pass them on to London for incorporation into the structure of the product. Clients are located and contacted by the liaison staff in Hong Kong. Negotiations between A-London and the clients are communicated through the liaison staff in Hong Kong.
(d) B-HK is not and shall not hold itself out as agent of A-London. Its engagement is restricted to the referral of potential investors to A-London and it will not have any power or authority to transact on behalf of A-London.
(e) In return for the services performed, B-HK will receive from Company A a fee calculated at a 5% mark-up on the actual direct and indirect cost incurred.

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4. The ruling

  Company A carries on business in Hong Kong through B-HK and profits arising in or deriving from Hong Kong are chargeable to Hong Kong Profits Tax under s.14(1) of the IRO.

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5. The period for which the ruling applies

  This ruling will apply for the year of assessment 2003/04 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

  No assumptions were made by the Commissioner.

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7 . Date of ruling issued

  2 April 2004.

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Additional Notes:

1. The ruling given is specific to the facts of this case as presented to the Department in its ruling application. It should not be interpreted as a ruling for general application.
2. In this case the specific ruling requested by the applicant is whether Company A carries on business in Hong Kong. The applicant did not request or present sufficient information for deciding whether Company A has profits arising in or derived from Hong Kong.
3. Whether an agency exists is a question of facts. In this case notwithstanding the express disclaimer of agency in the service agreement, the Department concluded that on the facts presented an agency could be implied.
  21 December 2004