Desktop VersionSite MapContact UsShare RSS
  • Default font size
  • Bigger font size
  • Biggest font size

Advance Ruling Case No. 37

1. The provisions of the Ordinance

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


 back to top

2. Background

(a) The Company is incorporated in Country X and is a member of an international group. It has registered a branch in Hong Kong ("the Branch").
(b) The Company imported goods from affiliated companies and sold them to customers all in Country X.
(c) The Branch is set up to fulfill requirements of the Company's customers in Country X so that they can manage by themselves the import related logistics in a more efficient manner.
(d) Other than the registered address, the Company does not maintain any office in Hong Kong. Neither does it employ any employees nor agents here. All the sales and purchase transactions are carried out by the Company's staff in Country X. These are assisted by the computer ordering system.
(e) By using the Branch, the Company benefits from shorter payment terms from the customers under the said arrangement as compared with the local payment terms that are usually 2 to 3 times longer.

 back to top

3. The arrangement 

(a) Prospective customers of Country X will issue notice of procurement schedule for vendors to bid. The Company will prepare for the bidding and its key account managers will discuss the price and product configuration with the customers in Country X.
(b) Upon a successful bidding, sale and purchase contracts in the name of the Branch will be prepared by the Company and signed by its general manager on behalf of the Branch and the customers in Country X.
(c) According to the sale and purchase contracts, the staff of the order desk of the Company in Country X will input the orders from customers into the ordering system. Upon the input, purchase orders in the name of the Branch will automatically be generated and sent to affiliated suppliers. Purchase prices are set by using the resale price (or market minus) method under the transfer pricing guidelines as developed by the Organization of Economic Cooperation and Development. There will not be any purchase from suppliers in Hong Kong.
(d) Goods are delivered by the suppliers directly to the customers in Country X, without transshipment through Hong Kong. The Company in Country X will monitor the detailed delivery status. All shipping documents and suppliers' invoices are sent to the Company in Country X for input to the ordering system. The customers' invoices in the name of the Branch will also be issued in Country X.
(e) After the delivery of the goods to the customers, the Company will install the equipment and provide after-sales services for the customers in Country X.
(f) The Company in Country X will decide on the credit limit extended to customers. For those sales under letter of credit terms, the letter of credit will be negotiated to the bank of the Branch by the Company's finance staff in Country X. Outstanding debts from the customers will be monitored and followed up by the Company in Country X.
(g) Upon the approval of payment by the Company's financial controller located in Country X, payments to suppliers are made with the assistance of a shared service centre in Country Y.
(h) The Company's financial controller will operate the bank account of the Branch to be opened for the trading of goods.
(i) The Branch books the profit derived from the sales and purchase transactions invoiced in its name. Bookkeeping and accounting for transactions of the Branch will be handled by the service centre and approved by the Company's financial controller in Country X.

 back to top

4. The ruling

  The trading profits booked in the accounts of the Company's Hong Kong branch are not arising in nor derived from Hong Kong, and thus are not chargeable to Hong Kong Profits Tax under Section 14(1) of the IRO.

 back to top

5. The period for which the ruling applies

  This ruling will apply for the year of assessment 2007/08 and subsequent years of assessment.

 back to top

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

(a) The suppliers and customers of the Branch are and will be located outside Hong Kong.
(b) Associates and companies in Hong Kong within the Group will not carry out any business or trading activities (including the preparation of trade documents) on behalf of or for account of the Branch.
(c) The existence of the Branch under the arrangement does not form a transaction or scheme or a part thereof contrived to avoid or evade any fiscal liabilities whether in Hong Kong or other tax jurisdictions.
(d) Profits booked in the Branch will be reported to the tax administration in Country X and will be subject to corporate tax in Country X under the Company.

 back to top

7 . Date of ruling issued 

  11 June 2008.


 back to top

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 would not effect any contracts for purchase and sale of the goods in Hong Kong. The trading profits to be derived by the Company are offshore sourced. Therefore, section 14 does not apply.

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