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Advance Ruling Case No. 30

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) The Company is an affiliate of Y Group whose main business is production and trading of motors. The Company has been providing administrative services to Y Group in Hong Kong.
(b) During 2005/06, Mr X became the majority shareholder and a director of the Company.
(c) Mr X has been residing in the PRC. He has extensive working experience and knowledge about a special type of ship. He has developed a business network of the shipping industry in the Far East, excluding Hong Kong.


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3. The arrangement 

(a) The Company and a UK firm, R Company will enter into a service agreement ("the Agreement") whereby the Company agrees to provide marketing research service to R Company, and to introduce Far East suppliers and customers in respect of a specified type of ship to R Company in return for service fees.
(b) The Company has set up an office in the PRC. Mr X and the Company's staff in the PRC will perform all the services set out in the Agreement outside Hong Kong.
(c) None of the services arising from or in connection with the Agreement will be rendered by the staff of the Company's Hong Kong office and Hong Kong director. They will continue to provide administrative services to Y Group in return for management fees which are subject to Hong Kong Profits Tax.

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4. The ruling

  The profits to be derived by the Company in the performance of the services set out in the Agreement will not be chargeable under Hong Kong Profits Tax.

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5. The period for which the ruling applies

  This ruling applies from the year of assessment in which the Agreement becomes enforceable until the year of assessment in which the Agreement is terminated.

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

(a) Far East, and Far East Region, as mentioned in the Agreement do not include Hong Kong.
(b) The Company will not sub-contract the services to be provided by the Company under the Agreement to Y Group, the Company's affiliates or any other third parties.


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7 . Date of ruling issued 

  12 March 2007.


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8. Commentary 


Under Section 14 of the IRO, every person who carries on a trade, business or profession in Hong Kong is chargeable to profits tax on the profits arising in or derived from Hong Kong. For service fee income, the source of profits is the place where the services are performed. In the present case, the Company's profits to be derived from the Agreement will not be chargeable to profits tax as all the relevant services will be performed outside Hong Kong.

(This commentary is not a legally binding statement and it does not form part of the Ruling.)