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Advance Ruling Case No. 31

1. The provisions of the Ordinance

  This ruling applies in respect of section 23B(3) and section 23B(12) of the Inland Revenue Ordinance ("IRO").

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2. Background

(a) Company A was a company incorporated in the Mainland. It owned the vessel "L".
(b) Company A had an agreement with Company B, a Hong Kong company, whereby Company B agreed to charter vessel "L" for a period of 24 months. The agreement was entered outside Hong Kong.
(c) Company C, a company incorporated in Hong Kong was a subsidiary of Company A. It carries on a charter hire business and does not maintain any office or have any bank account in Hong Kong. It appoints an independent third party in Hong Kong to forward any business enquiries to its directors who work in the Mainland. The staff of Company A handle the administration work for Company C.
(d) Company C is also the owner of vessel "G", a vessel registered in Country P.

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3. The arrangement 

(a) Vessel "L"
  i. Company A entered into a supplementary charter hire agreement with Company C whereby Company A agreed to charter vessel "L" to Company C for its charter hire business.
  ii. At the same time Company A assigned its time charter agreement with Company B to Company C where Company C replaced Company A as the charterer of vessel "L". The contractual rights and obligations were transferred from Company A to Company C by a supplementary charter agreement.
  iii. To facilitate the management of vessel "L", a third party shipping management company, Company S, was appointed by Company A on behalf of Company C as the vessel manager. Company S would handle all general vessel management for vessel "L", including recruiting and training of crews, supervising repairs and maintenance of the vessel and giving guidance to the ship master for the designated ports.
(b) Vessel "G"
  i. Company C entered into a time charter agreement with Company D, a third party in the Mainland, for chartering of vessel "G" for about 36 to 38 months.
  ii. Under the time charter agreement, vessel "G" is allowed to navigate throughout the world.
  iii. Similar to vessel "L", Company C also appointed Company S as the vessel manager of vessel "G" for the provision of all general vessel management services.
(c) All the time charter agreements and management agreements were negotiated and concluded by Company A or Company C outside Hong Kong.
(d) Both vessels have never entered into Hong Kong waters and there is no plan for them to navigate between any location within the waters of Hong Kong and any location within river trade waters in the foreseeable future.

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4. The ruling

  The charter hire income derived by Company C from the chartering of vessels "L" and "G" are not included as relevant sums as defined under section 23B(12) of the IRO. Such income is not chargeable to Hong Kong Profits Tax under section 23B(3) of the IRO.

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5. The period for which the ruling applies

  The above ruling will apply for the years of assessment 2005/06 and 2006/07.

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

  The Commissioner assumes that the two vessels "L" and "G" continue to navigate between locations outside Hong Kong waters.


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7 . Date of ruling issued 

  19 March 2007.


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8. Commentary 


In the present case, the vessels concerned have never entered into Hong Kong waters. The charter hire income derived by Company C from the chartering of the vessels are therefore not included as "relevant sums" as defined under Section 23B(12) of the IRO.

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