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Advance Ruling Case No. 43

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 a private limited company incorporated in Hong Kong.
(b) All the Company's directors are Taiwanese citizens. They reside and work either in Taiwan or Mainland China.
(c) The Company does not employ any staff nor maintain any establishment in Hong Kong.
(d) The sole shareholder of the Company is S Limited, a foreign invested company established in Mainland China.
(e) S Limited is engaged in investment holding, manufacturing and trading of electronic components and parts.
(f) The ultimate holding company of the Company and S Limited is H Limited, a company founded in Taiwan and listed on the Stock Exchange of Taiwan.

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3. The arrangement 

(a) The Company is set up as an intermediary between S Limited and third party suppliers on indent sales of computer parts and peripheral products. It commenced business in December 2008.
(b) The Company does not maintain any office, employ any staff nor appoint any agent in Hong Kong with regard to the purchase and sale of commodities. The directors of the Company will not carry out any management functions in Hong Kong.
(c) The solicitation of suppliers, negotiation and conclusion of purchases, placement of orders, authorizing payments to suppliers, issuance of sales invoices to customers, monitoring receipts, preparation of accounting entries and books and records relating to the purchase and sale transactions are all conducted by staff of S Limited outside Hong Kong.
(d) Documentation and banking activities are carried out by staff of S Limited outside Hong Kong.
(e) The Company does not maintain any stock of merchandise. The merchandise will be shipped directly from third party suppliers to S Limited in Mainland China.
(f) The Company has engaged a third party service provider in Hong Kong for company secretarial services and re-direction of correspondence. The service provider does not have authority to conduct any purchase and sale transactions on behalf of the Company.

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4. The ruling

  The Company will not be chargeable to Hong Kong Profits Tax under section 14 of the IRO in respect of the profits, if any, derived from the arrangement.

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5. The period for which the ruling applies

  This ruling will apply for the year of assessment 2008/09 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

  The ruling is based on the assumptions that S Limited is the sole customer of the Company; and that all the sales to S Limited are made at zero mark-up.


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7 . Date of ruling issued 

  2 June 2010.


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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 contracts of purchase and sale of goods would be effected outside Hong Kong. The trading profits, if any, to be derived by the Company from the transactions are offshore sourced. Therefore, the Company would not be chargeable to profits tax on the relevant profits.

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