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Advance Ruling Case No. 35

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 was incorporated in Country A. It is engaged in the manufacture and sale of printing machinery and spare parts for such machinery.
(b) The Company manufactures spare parts in Country A. Apart from its own manufacture, the Company also purchases spare parts from ex-Hong Kong suppliers.
(c) The spare parts are sold by the Company to its global subsidiaries which act as distributors in their local markets.

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3. The arrangement 

(a) The Company will locate a stock of the spare parts in Hong Kong on the premises of an independent Warehouse Manager ("the Warehouse Manager") to facilitate the distribution of these products to subsidiaries in the Asia Pacific region.
(b) The Warehouse Manager will neither display nor provide information regarding the stock. It will not communicate with customers of the Company. It will not be involved in any negotiation or conclusion of purchase or sale orders on behalf of the Company.
(c) The Warehouse Manager will merely store the products safely and pack the products for shipment upon instruction from the Company in Country A. The Company will, in Country A, negotiate directly with the third party carriers for delivery of the spare parts from the Hong Kong stockpile to the customers.
(d) The Company will not maintain any office, employ any staff nor appoint any agent in Hong Kong in regard to the purchase and sale of the spare parts.
(e) All the purchases and sales of the spare parts will be negotiated and concluded by the Company in Country A. All paperwork and banking activities relating to purchases and sales will be handled in Country A.

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4. The ruling

  The Company will not be chargeable to Profits Tax under section 14 of the IRO in respect of the profits it derives from the trading of such spare parts located in Hong Kong.


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5. The period for which the ruling applies

  This ruling will apply from the year of assessment during which the stockpile will be created, expected to be 2007/08 and all future 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

  The Commissioner has assumed that the arrangement would be implemented in the way stated in the ruling application and the ruling.

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7 . Date of ruling issued 

  30 August 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. In the present case, the Company did not effect any purchases and sales of spare parts in Hong Kong. The creation of a Hong Kong stockpile at the premises of a third party warehouse manager would not alter the offshore nature of profits derived from the trading of spare parts. Therefore Section 14 does not apply.

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